McDonough v . First American Title 10-CV-106-SM 1/28/11 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Brian McDonough; Melanie McDonough; and Anne N . Posnack, Tr.; for themselves and on behalf of all others similarly situated, Plaintiffs

v. Case N o . 10-cv-106-SM Opinion N o .

First American Title Insurance Company, Defendant

O R D E R

In a putative class action, removed from the New Hampshire

Superior Court, plaintiffs assert a federal claim under the

Racketeer Influenced and Corrupt Organizations Act (“RICO”)

(Count I ) , as well as state common law claims for breach of

contract and unjust enrichment. Plaintiffs are homeowners who

refinanced mortgages. They allege that First American Title

Insurance Company (“First American”), acting in concert with a

“network” of title agents who sold First American title

insurance, collected premiums at an “original rate,” rather than

a lower “reissue rate” to which they were entitled. Before the

court is defendant’s motion to dismiss the federal RICO claim for

failure to state a claim upon which relief can be granted.

Plaintiffs object. For the reasons given, defendant’s motion to

dismiss is granted. The Legal Standard

A motion to dismiss for “failure to state a claim upon which

relief can be granted,” F E D . R . C I V . P . 12(b)(6), requires the

court to conduct a limited inquiry, focusing not on “whether a

plaintiff will ultimately prevail but whether the claimant is

entitled to offer evidence to support the claims.” Scheuer v .

Rhodes, 416 U . S . 232, 236 (1974). That i s , the complaint “must

contain ‘enough facts to raise a reasonable expectation that

discovery will reveal evidence’ supporting the claims.” Fantini

v . Salem State Coll.,

2 , 26 (1st Cir. 2009) (quoting

Bell Atl. Corp. v . Twombly, 550 U . S . 544, 556 (2007)).

When considering a motion to dismiss under Rule 12(b)(6), a

trial court “assume[s] the truth of all well-plead facts and

give[s] the plaintiff[s] the benefit of all reasonable inferences

therefrom.” Vernet v . Serrano-Torres,

(1st

Cir. 2009) (quoting Ruiz v . Bally Total Fitness Holding Corp.,

, 5 (1st Cir. 2007)). “To survive a motion to dismiss,

a complaint must contain sufficient factual matter, accepted as

true, to state a claim to relief that is plausible on its face.”

Sutliffe v . Epping Sch. Dist.,

(1st Cir. 2009)

(quoting Ashcroft v . Iqbal, 129 S . C t . 1937, 1949 (2009)).

Finally, however, a Rule 12(b)(6) motion should be granted if

“the facts, evaluated in [a] plaintiff-friendly manner, [do not]

2 contain enough meat to support a reasonable expectation that an

actionable claim may exist.” Andrew Robinson Int’l, Inc. v .

Hartford Fire Ins. Co.,

8 , 51 (1st Cir. 2008)

(citations omitted).

Background

The relevant facts, drawn from the complaint and evaluated

in a plaintiff-friendly manner, are as follows.

Brian and Melanie McDonough (“the McDonoughs”), and Anne

Posnack, each refinanced home mortgages in 2008. The refinanced

mortgages were less than five years old. When they refinanced,

the McDonoughs, and Posnack each purchased lender’s title

insurance policies issued by First American. They were charged a

premium applicable to the original issuance of title insurance,

instead of a lower “reissue rate” that applied when “a borrower

refinances within FIVE years of a recorded first mortgage by an

institutional lender.” (Second Am. Decl. (document n o . 2 - 5 ) , at

16.) At all times relevant to this matter, both First American’s

original rate and its reissue rate were on file with the New

Hampshire Insurance Commissioner. Because they paid the original

rate, rather than the lower reissue rate for which they

qualified, the McDonoughs were overcharged by $234.20, and

3 Posnack was overcharged by $364.70. The named plaintiffs claim

to represent many others who are similarly situated.

First American sells title insurance through title agents.

Different title agents handled the transactions described in the

complaint: Monique D. Donovan Law Office, LLC (McDonough), and

Mazerolle & Frasca PA (Posnack). Title agents generally conduct

title searches, that yield information necessary to determine

whether a refinancing homeowner qualifies for First American’s

reissue rate. The title agents are paid commissions by First

American that generally consist of a percentage of the premiums

paid for the policies they sell.

First American’s title agents operate under “title agency

agreements with First American, pursuant to which they arrange,

sell, produce, issue and otherwise assist First American in

issuing title insurance policies.” (Second Am. Decl. ¶ 7 1 ) .

Each “agency agreement . . . states the conditions under which

the title agent is authorized to issue title insurance policies

on behalf of First American.” (Id. at ¶ 76.)

The title agents “are not employees of First American, but

rather they are licensed, nonexclusive agents who work with

different title insurance companies.” (Id. ¶ 72.) They are

4 “separate, independent entities who do not function as

subsidiaries or employees of First American.” (Id.)

“The title agents [conduct title searches and calculate

title-insurance premiums] subject to First American’s direction

and control.” (Id. ¶ 73.) That direction and control

“include[s] the use of standardized systems and procedures for

conducting title searches, for calculating, collecting and

processing payments for title searches and title insurance

policies, and for providing title insurance for lenders and

owners.” (Id. ¶ 75.) First American “has an agent selection

process and audit review program” (id. at ¶ 7 6 ) , “conducts

periodic audits of its title agents” ( i d . ) , and “performs on site

inspections of the title agents’ books and records on an annual

basis” ( i d . ) . First American also “issues the standardized

manuals to be followed by all of the Title Agents in connection

with the production of title insurance policies” (id. ¶ 7 7 ) ; it

“touts . . . [a] title closing production software system

specifically designed by First American for its title agents”

(id. ¶ 7 8 ) ; and it provides its title agents with onsite and

online training for that system ( i d . ) .

In their complaint, and throughout their pleadings,

plaintiffs refer to First American’s “network of title agents.”

5 (Id. ¶ 2.) They allege no facts, however, suggesting any

connection or communication between or among First American’s

title agents. Thus, the phrase “network of title agents” does

not supportably allege any concerted or coordinated activity

between or among those agents.

First American’s title agents also serve as closing or

settlement agents with respect to home purchases. In that role,

they prepare or review the HUD Settlement Statements presented to

homeowners at closing. Those statements list, among other

things, the premium charged and paid for title insurance. In

addition, First American’s title agents, acting as settlement

agents, collect and disburse premium payments to First American.

The following paragraph in the complaint neatly encapsulates

the essence of plaintiffs’ claims:

First American was able to accomplish its fraudulent scheme because of the dual role performed by the Title Agents, i.e., that of Settlement Agent as well as that of Title Agent. This has enabled First American to control the closing, have the fraudulent inflated charges inserted into the HUD Settlement Statements, and receive the misappropriated sums. Because the Title Agent and Settlement Agent were one and the same, the plaintiffs and class members were lulled into a false sense of security by the Title Agent/Settlement Agent that the correct amount was charged for title insurance. And there are no checks and balances in place - there was no helpful, or at least uninterested, entity conducting the closing, to review the paperwork and explain the charges (including

6 the title insurance charges) to the homeowner, and to potentially discover the fraudulent charge and point it out to the homeowner.

(Id. ¶ 83.)

Regarding the underlying mail and wire fraud allegations —

the criminal conduct allegedly engaged in by First American and

its title agents — plaintiffs allege that: (1) First American

and/or its title/settlement agents transmitted to mortgage

lenders, by mail or by wire, inflated title insurance premium

figures; (2) mortgage lenders sent plaintiffs Good Faith

Estimates of closing costs, by mail, that included the inflated

insurance premiums; (3) mortgage lenders transmitted, by wire,

loan proceeds used to pay the inflated insurance premiums; (4)

title/settlement agents transmitted to First American, by wire,

insurance premiums; and (5) title/settlement agents transmitted

to mortgage lenders, by mail or wire, title insurance policies.

Discussion

Plaintiffs’ civil RICO claim asserts that First American

used an enterprise, consisting of itself and its title agents, as

a vehicle to commit mail and wire fraud. First American moves to

dismiss plaintiffs’ RICO claim on grounds that plaintiffs have

failed to plead a valid “association-in-fact” RICO enterprise,

and that they have failed to allege a predicate act of mail or

7 wire fraud with the degree of particularity required by Rule 9(b)

of the Federal Rules of Civil Procedure.

A. RICO Legal Standards

Plaintiffs bring their RICO claim under

(c),

which provides:

It shall be unlawful for any person employed by or associated with any enterprise engaged i n , or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.

The statute’s purpose is two-fold: to protect “a legitimate

‘enterprise’ from those who would use unlawful acts to victimize

it” and to protect “the public from those who would unlawfully

use an ‘enterprise’ (whether legitimate or illegitimate) as a

‘vehicle’ through which unlawful . . . activity is committed.”

Cedric Kushner Promotions, Ltd. v . King,

(2001)

(citations omitted).

A valid claim under section 1962(c) “must allege each of the

four elements required by the statute: (1) conduct (2) of an

enterprise, (3) through a pattern (4) of racketeering activity.”

Soto-Negrón v . Taber Partners I ,

5 , 38 (1st Cir. 2003)

(quoting N . Bridge Assocs., Inc. v . Boldt,

8 , 42 (1st

8 Cir. 2001), citing Sedima, S.P.R.L. v . Imrex Co.,

(1985)). The statute defines “enterprise” as any “legal

entity,” such as an “individual, partnership, corporation,

association” and “any other union or group of individuals

associated in fact although not a legal entity.”

(4). “[T]he Supreme Court has admonished that RICO and the term

‘enterprise’ be construed expansively.” United States v . Cianci,

1 , 78-79 (1st Cir. 2004) (citing Sedima,

; Turkette, 452 U.S. at 586-87.)

B. Association-in-Fact Enterprise

In their complaint, plaintiffs generally characterize the

contractual relationships between First American and its various

title agents as creating a RICO association-in-fact enterprise.

But First American points out that the complaint does not

adequately plead facts showing First American to be sufficiently

distinct from the enterprise described in the complaint; does not

adequately allege the necessary structural features of a RICO

association-in-fact enterprise (specifically, First American’s

title agents are not alleged to have had any relationship with

each other); and does not allege a RICO enterprise independent of

the purported racketeering acts on which First American is said

to have engaged.

9 Defendant’s first “association-in-fact” challenge raises a

question not yet addressed by the court of appeals for this

circuit — whether a corporate RICO “person” can associate with

non-employee agents, such as the title agents described here, to

form a RICO enterprise. Though some district courts in other

circuits have answered that question in the affirmative (see

e.g.,Levine v . First American Title Ins. Co., N o . 09-842,

(E.D. Pa. Jan. 1 4 , 2010); Conte v . Newsday, Inc.,

, 136 n . 6 (E.D.N.Y. 2010)), there is reason to think

otherwise, and, indeed, district court decisions in this circuit

suggest a different result. See e.g., Mear v . Sun Life Assurance

Co. of Canada, N o . 06-12143-RWZ,

, at *9 (D. Mass.

Jan. 2 4 , 2008)(holding complaint that alleged defendant

corporation and its agents comprised RICO enterprise, failed to

state a claim “[b]ecause Sun Life, a corporation, can only act

through its employees, officers, subsidiaries and agents.”); see

also, Rodriquez v . Banco Central,

(D.P.R.

1991)(“[T]he distinction requirement is not satisfied by merely

naming a corporation and its employees, affiliates, and agents as

an association-in-fact”)(emphasis added). It is not necessary to

resolve the issue in this case, however, because First American’s

second point, regarding the structure of the alleged enterprise,

is correct. (The court likewise does not decide whether an

10 enterprise independent of the purported racketeering acts

allegedly engaged in has been adequately pled.)

In Boyle v . U.S., 129 S . C t . 2237 (2009), the Supreme Court

held that “an association-in-fact enterprise must have at least

three structural features: a purpose, relationships among those

associated with the enterprise, and longevity sufficient to

permit these associates to pursue the enterprise’s purpose.”

Boyle, 129 S . C t . at 2244 (emphasis added). See also Turkette,

452 U.S. at 583 (explaining that existence of a RICO enterprise

“is proved by evidence of an ongoing organization, formal or

informal, and by evidence that the various associates function as

a continuing unit”).

Explaining the structural attributes of an “association-in-

fact,” the Court stressed the importance of interrelationships

between or among the association’s parts:

[T]he term structure means “[t]he way in which parts are arranged or put together to form a whole” and “[t]he interrelation or arrangement of parts in a complex entity.” American Heritage Dictionary 1718(4th ed. 2000)).

...

The concept of “association” requires both interpersonal relationships and common interest.

129 S . C t . at 2244

11 The First Circuit’s pre-Boyle decisions are generally

consistent with Boyle’s “relationships” requirement. See e.g.,

United States v . Cianci,

1 , 82 (1st Cir. 2004)(“those

associated in fact [must] ‘function as an ongoing unit’ and

constitute an ‘ongoing organization.’ ”.

(quoting United

States v . Patrick,

1 , 19 (1st Cir. 2001)).

Here, plaintiffs complaint seems to allege a RICO

“enterprise” consisting of a “hub-and-spoke” structure, with

First American as the hub and the various agents at the ends of

the spokes. But the complaint does not allege facts supporting a

claim of any relationship between or among the title agents.

Plaintiffs say that the complaint nevertheless adequately alleges

that First American and its title agents were organized as a

“network” consisting of much more than a simple hub-and-spoke

conspiracy.

The First Circuit has yet to decide whether a hub-and-spoke

organization can qualify as an “enterprise” for RICO purposes.

The Third Circuit’s post-Boyle decision in In re Insurance

Brokerage Antitrust Litigation,

(3rd Cir. 2010),

however, persuasively addresses the point, as do pre-Boyle cases

from the District of Massachusetts, in which hub-and-spoke

12 structures have been held not to qualify as RICO “enterprises.”

See In re Pharm. Indus. Av. Whsle. Price Litig.,

(D. Mass. 2003); In re Lupron®,

(D. Mass. 2003).

In In re Insurance Brokerage, the Third Circuit upheld the

dismissal of plaintiff’s RICO claim for failure to adequately

allege an “enterprise.”

. Plaintiffs’ complaint

alleged facts suggesting that the defendant insurance broker was

at the center of an association consisting of the broker as the

hub, and numerous insurers at the end of the spokes. The court

of appeals, applying the relatively new pleading requirements

described in Twombly, 550 U.S. at 556, held that plaintiffs had

not pled facts “plausibly implying the existence of an enterprise

with the structural attributes identified in Boyle.”

. The court found the complaint deficient in failing to plead

Boyle’s second structural attribute: “‘relationships among those

associated with the enterprise.’”

(quoting Boyle, 129 S . C t .

at 2244). Allegations that the broker had similar, but distinct

agreements with each insurer, and that each insurer knew the

identities of the broker’s other insurer-partners, did not

plausibly imply the existence of relationships between or among

the insurers.

. In short, plaintiffs “failed to

plead any facts plausibly suggesting collaboration among the

13 insurers.”

. . See also Conte,

(holding that hub-and-spoke structure does not meet Boyle’s

second structural requirement).

In this case, plaintiffs heavily rely on Levine,

, in urging a different outcome. While Levine is

factually quite similar, and involves the same defendant, First

American, First American appears not to have interposed a hub-

and-spoke defense in that case. In any event the opinion does

not address the absence of any plausible allegations of an

interrelationship between or among the title agents.

Not only is the Third Circuit’s reasoning in In re Insurance

Brokerage persuasive, but pre-Boyle decisions in the First

Circuit also support the dismissal of civil RICO claims that

allege only hub-and-spoke structures. In In re Pharmaceutical

Industry, for example, the court held that hub-and-spoke

structures are not RICO “enterprises.”

-

83. In that case, the plaintiffs “allege[d] twenty-one separate

‘AWP Enterprises,’ each consisting of a single defendant

pharmaceutical company and all the medical providers that

prescribe its drugs with a reported AWP.”

. The court characterized the alleged enterprise as “a hub-

and-spoke design, with an individual drug manufacturer at the

14 center dealing independently with each individual provider as the

spoke.”

.

In ruling that such a structure does not comprise a RICO

enterprise, the court looked to the “analogous context” of anti-

trust, where “the Supreme Court has rejected a similar alleged

hub-and-spoke conspiracy which had a pattern of separate spokes

meeting at the common center without the rim of the wheel to

enclose the spokes.”

(citing Kotteakos v . United States,

(1946)). The court cautioned, as did the Supreme

Court in Kotteakos, “‘against confusing the common purpose of a

single enterprise with the several, though similar, purposes of

numerous separate enterprises of like character.’”

(quoting

Kotteakos,

. See also In re Lupron®,

(holding that an alleged organization,

consisting of a pharmaceutical products company and all doctors

and other distinct providers of medical services who dispensed

the drug Lupron® to patients, did not comprise a RICO

association-in-fact enterprise).

The complaint here fails to allege a RICO “enterprise”

because the allegations plausibly suggest only a hub-and-spoke

structure, with no relationships between the title agents — no

connecting rim. As in In re Insurance Brokerage, plaintiffs

15 merely allege a series of distinct, albeit similar, contractual

relationships between First American and its independent title

agents. The complaint does not allege any relationship between

or among the title agents (the spokes). Finally, the complaint’s

general allegation that the title agents worked as a “network”

does not suffice. It is a mere conclusory allegation, and

cannot, without more, “plausibly suggest[...] collaboration among

the insurers.” In re Insurance Brokerage,

.

And, the allegation is belied by plaintiffs’ own detailed factual

allegations describing only individual relationships between

First American and its distinct title agents.

For these reasons, the court finds that the complaint fails

to plausibly allege “relationships among those associated”

(Boyle, 129 S . C t . at 2244), and so fails to state a civil RICO

claim.

Conclusion

Because the complaint does not allege a valid association-

in-fact RICO enterprise, First American is entitled to dismissal

of plaintiffs’ RICO claim. Accordingly, First American’s motion

to dismiss (document n o . 10) is granted. The Second Amended

Complaint is dismissed. Plaintiffs may file a third amended

complaint, within thirty (30) days of the date of this order,

16 limited to correcting the pleading deficiencies addressed, if it

can do so supportably and in good faith (see Fed. R. Civ. P.

11(b)).

SO ORDERED.

January 2 8 , 2011

cc: Edward K. O’Brien, Esq. Charles A . Newman, Esq. Elizabeth T . Ferrick, Esq. Hannah F. Preston, Esq. Andru H. Volinsky, Esq.

17