RICO — Allegedly Inflated Cost of Appraisal in Mortgage Transaction Does Not Constitute Concrete Financial Loss Absent Factual Allegations Demonstrating It Exceeded Market Price or Was Not Independent, as Billed

Gomez v. Wells Fargo Bank, N.A., 2012 U.S. App. LEXIS 7370 (8th Cir. April 12, 2012):

Grant A. Gomez and Lanie L. Gomez (the Gomezes) sought to establish a nationwide class of thousands of borrowers who allegedly paid inflated appraisal fees in connection with real estate transactions financed by Wells Fargo Bank, N.A. (Wells Fargo). ***

B. RICO and AZRAC

"Section 1962 of the RICO Act makes it 'unlawful for any person employed by or associated with any enterprise engaged in, 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.'" Nitro Distrib., Inc. v. Alticor, Inc., 565 F.3d 417, 428 (8th Cir. 2009) (quoting 18 U.S.C. § 1962(c)). "Any person injured in his business or property by reason of a violation of [ § 1962] may sue therefor" in federal court and recover treble damages. 18 U.S.C. § 1964(c). Similarly, AZRAC [Arizona's anti-racketeering statute ] authorizes suit by "[a] person who sustains reasonably foreseeable injury to his person, business or property by a pattern of racketeering activity." Ariz. Rev. Stat. § 13-2314.04(A), (T).

Footnote 6. The Gomezes do not dispute the district court's conclusion the Gomezes conceded "that there is no substantive difference between the Arizona [AZRAC] and federal RICO standing requirements." ***

"To have standing to make a RICO claim, a party must have 1) sustained an injury to business or property 2) that was caused by a RICO violation." Asa-Brandt, Inc. v. ADM Investor Servs., Inc., 344 F.3d 738, 752 (8th Cir. 2003). "[A] showing of injury requires proof of concrete financial loss, and not mere injury to a valuable intangible property interest." Regions Bank v. J.R. Oil Co., LLC, 387 F.3d 721, 728 (8th Cir. 2004) (quoting Steele v. Hosp. Corp. of Am., 36 F.3d 69, 70 (9th Cir. 1994) (internal quotation marks omitted)).

Applying these standards to the Gomezes' complaint, the district court determined the Gomezes lacked standing under RICO and AZRAC because "the alleged RICO violations did not cause the Gomezes to suffer any 'concrete financial loss.'" Noting "[t]he complaint concedes that 'Wells Fargo maintained market rates to its borrowers,'" the district court determined the Gomezes "would have been in the same [financial] position in the absence of the alleged RICO violations."

The Gomezes assert they "adequately allege[d] several grounds that support their standing under RICO even if [Wells Fargo] 'maintained market rates to its borrowers for appraisals.'" We disagree.

The Gomezes first argue appellees violated RICO "by deceptively convincing [the Gomezes] that the $495 paid to Rels was the actual cost of the appraisal when the actual cost was $200 or less" and not passing on the reduced rate or disclosing the markup to the borrower. According to the Gomezes, their "damages are measured by the amount by which [the appellees] marked up their appraisal fee, regardless of 'fair market value.'" In support of this theory of RICO liability, the Gomezes rely on Potomac Elec. Power Co. v. Elec. Motor and Supply, Inc., 262 F.3d 260, 265 (4th Cir. 2001), in which the Fourth Circuit stated,

If a party specifically bargains for a service, is told that the service has been performed, is charged for the service, and does not in fact receive the service, it is not appropriate for courts to inquire into whether the service "really" had value as a precondition to finding that injury to business or property has occurred. See Hellenic Lines, Ltd. v. O'Hearn, 523 F. Supp. 244, 248 (S.D.N.Y. 1981) (stating that RICO injury is proved where a company demonstrated that "padded" bills resulted in payment for services not rendered).

The Gomezes assert they "paid a padded bill for appraisal services and, therefore, have standing under RICO."

The Gomezes' reliance on Potomac and Hellenic is misplaced. As the district court noted, neither case is persuasive because the plaintiffs in those cases "alleg[ed] that they paid for services they did not receive." In contrast, the Gomezes admit they received appraisal services and paid market rates for those services. The Gomezes simply fail to allege a concrete financial loss as required by RICO and AZRAC.

The Gomezes next argue their "general allegations about market value are irrelevant" because "the fair market value of the appraisals at issue is measured by the actual amounts paid by Rels to the appraisers." The Gomezes contend they were harmed when appellees "reset the market to the level that [appellees] paid the appraisers but charged [the Gomezes] far in excess of that new market rate."

We decline the Gomezes' invitation to ignore the factual allegations in the complaint in favor of a flawed method of determining fair market value belatedly conceived in an attempt to avoid dismissal. By focusing exclusively on one part of the appraisal process--the field work--the Gomezes' suggested method completely ignores the appraisal management services the Gomezes admit Rels provided. More importantly, the market rate that matters for determining whether the Gomezes suffered a concrete financial loss is the market rate charged to borrowers, which the Gomezes admit did not change as a result of the challenged practices.

Finally, the Gomezes contend they suffered a financial loss because "they did not receive an appraisal worth the apparent market value for a valid, independent appraisal." This argument is unpersuasive. The Gomezes fail to articulate any defect in their appraisals or any direct financial harm they suffered as a result of the appraisals performed on their property. As Rels points out, the primary purpose of an appraisal is to protect the lender's interests by ensuring the value of the collateral is sufficient to secure the loan. See 12 U.S.C. § 2607(c) (allowing for "a real estate appraiser chosen by the lender to represent the lender's interest in a real estate transaction").

Because the Gomezes did not plausibly allege a concrete financial loss caused by a RICO violation, the district court did not err in concluding they lacked standing under RICO and AZRAC. See Brennan v. Chestnut, 973 F.2d 644, 648 (8th Cir. 1992) ("A RICO plaintiff has standing only if injured in his business or property.").

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