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Smith v. Dorchester Real Estate, Inc.

United States Court of Appeals, First Circuit

October 15, 2013

ROBERT SMITH, Plaintiff, Appellee/Cross-Appellant,
v.
DORCHESTER REAL ESTATE, INC.; NEW ENGLAND MERCHANTS CORP., Defendants, Appellees/Cross-Appellees, MARIA DASILVA, Plaintiff, DWIGHT JENKINS; LOUIS G. BERTUCCI; ROBERT E. KELLEY; RKELLEY-LAW, P.C.; EB REAL ESTATE GROUP, INC., d/b/a RE/MAX Real Estate Specialists; UNION CAPITAL MORTGAGE BUSINESS TRUST; SIGNATURE GROUP HOLDINGS, INC., f/k/a Fremont Investment &Loan, a/k/a Fremont Reorganization Corporation, Defendants, Cross-Appellees, CHERRY JENKINS; DOREA SMITH; MID CITY MORTGAGE, LLC; MERITAGE MORTGAGE CORPORATION, Defendants.

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Richard G. Stearns, U.S. District Judge]

Michael J. Markoff, on brief for New England Merchants Corp.

Thomas K. McCraw, Jr., with whom Jay S. Gregory and LeClairRyan, A Professional Corporation, were on brief, for Dorchester Real Estate, Inc.

James F. McLaughlin, with whom McLaughlin & McLaughlin, P.C. was on brief, for RKelley-Law, P.C. and Robert E. Kelley.

Jeffrey S. Baker, with whom Baker & Associates., P.C., Jonathan D. Plaut, Chardon Law Offices, Patrick M. Groulx and Polis Legal, were on brief, for appellee/cross-appellant.

Before Howard, Stahl and Thompson, Circuit Judges.

HOWARD, Circuit Judge.

This case arises out of a fraudulent real estate mortgage scheme that involved inducing a schizophrenic trash collector into acting as a straw buyer for two overvalued residential properties in Massachusetts. That person, Robert Smith, sued various entities and individuals involved in the transactions, including the mortgage lenders, mortgage brokers, real estate brokers, and closing agents. A jury returned a verdict largely favorable to Smith on his claims of fraud and breach of fiduciary duty, and the district court doubled and trebled certain damages pursuant to the Massachusetts Consumer Protection Statute. Two of the defendants, real estate brokerage firm Century 21 Dorchester Real Estate, Inc. ("Century 21") and mortgage broker New England Merchants Corporation ("NEMCO") appeal the unfavorable verdict on multiple grounds. Smith cross-appeals the dismissal of several claims. We affirm in part and reverse or vacate other rulings.

I.

We recite the relevant facts in the light most favorable to the jury verdict. Incase Inc. v. Timex Corp., 488 F.3d 46, 50 (1st Cir. 2007).

Evidence was introduced from which the jury could have concluded that Smith, who was in his mid-forties during the relevant time period, suffers from schizophrenia, depression, posttraumatic stress disorder, and mild mental retardation. He is functionally illiterate. In January 2005, a woman who introduced herself as Laurice Taylor approached Smith while he was working as a trash collector for the Waste Management Corporation in Dorchester, Massachusetts. Taylor told Smith that she worked at a nearby RE/MAX real estate office and invited him to participate in a "special investment program" through RE/MAX. So long as he had good credit, Smith would receive $10, 000 per investment without contributing any capital. Taylor reassured him that "RE/MAX would take care of everything, " and Smith agreed to participate.

Unbeknownst to Smith, the investment opportunity was an illicit scheme developed by Dwight Jenkins, a convicted bank fraudster. In the words of the district court,

Jenkins trolled the margins of society for the gullible (like Smith) and the greedy . . . whom he recruited as straw "investors" in shady real estate deals. With the help of louche mortgage brokers and a complicit attorney, the "investors" were inveigled into taking out "liar loans" for the purchase of overvalued residential properties. The "investors" received a small fee, while Jenkins and his cohorts (including the brokers) skimmed fees and commissions from the grossly inflated purchase prices.

Smith v. Jenkins, 818 F.Supp.2d 336, 340 (D. Mass. 2011). The basics of the scheme may be briefly described. With the assistance of real estate agents, Jenkins would find a residential property for sale and enter into a purchase and sale agreement with the seller for the listing price. He would then assign the right to purchase the property to a straw buyer for a significantly higher price. At the closing, the straw buyer would borrow the amount of the higher purchase price, the seller would receive the lower listing price, and Jenkins would take the difference as a "contract release fee." Jenkins characterized this arrangement to the straw buyers as an "investment, " promising to maintain the property, collect rent, pay operating bills, mortgages, and other expenses, and eventually sell the property at a profit in which the straw buyer would share.

Smith's evidence on the specifics of the two transactions involved in this litigation follow.

A. The Dighton Property

After Smith agreed to participate in the purported investment program, he provided his accurate financial information to Taylor. Without his knowledge, Jenkins and Taylor then created a false financial profile for him that grossly overstated his income, assets, and work and renting history. This made him appear, on paper, a more attractive candidate for a mortgage loan. They forwarded the information to Rachel Noyes, a loan originator who worked for mortgage broker NEMCO. Noyes completed a loan application on Smith's behalf (and without his knowledge), falsely indicating that she had gathered the information in a face-to-face interview with Smith, and sent the application to mortgage lender Fremont Investment & Loan. Fremont approved Smith for a "stated income" loan, which did not require income verification.

Shortly thereafter, Taylor instructed Smith to attend a meeting at the law office of RKelley-Law, P.C., to sign documents for an investment. Unbeknownst to Smith, the meeting was a closing on a home in Dighton, Massachusetts. At the closing, Taylor introduced Smith to Jenkins and James Adamos, a real estate agent who worked for Century 21. Adamos handed Smith his business card and said that he was a representative of Century 21. Attorney Louis Bertucci, an associate at RKelley-Law, introduced himself to Smith as the lawyer in charge of the paperwork and assured him that the documents were "in order." Smith did not read any of the documents, including those that he signed, nor did anyone explain to him that he was in fact borrowing $411, 964, secured by two mortgages issued by Fremont, to purchase a property. Those present led him to believe that they had his best interests in mind, and he trusted them to handle the "investment" on his behalf. Smith was confident that the investment was legitimate because two well-known companies, RE/MAX and Century 21, were involved in it.

Several days after the Dighton closing, Smith went to RE/MAX's office and there Taylor gave him $10, 000. He subsequently signed a document giving Jenkins a power of attorney over the Dighton property. Jenkins received a "contract release fee" of $42, 000. NEMCO received a mortgage broker's commission of $8, 800. According to the closing documents, no real estate broker received a commission from the sale.

B. The Boston Property

Approximately a week later, Taylor contacted Smith again and instructed him to attend a second meeting at RKelley-Law in order to participate in another investment. In the meantime, Jenkins, through Adamos, offered to purchase a residential property in Boston listed through Century 21. Century 21 real estate agent Ivana Foley relayed the offer to the seller, who accepted it. As on the previous occasion, the plan was for Jenkins to assign the purchase and sale agreement to Smith for a price substantially higher than the listing price and collect the difference.

This time Philip Goodwin, a loan originator who worked for Union Capital Mortgage Business Trust ("Union Capital") filled out a loan application on Smith's behalf (without meeting Smith) and forwarded it to Meritage Mortgage Corporation ("Meritage"). Like the application for the Dighton property, this application also misrepresented Smith's income, assets, and other pertinent information. The application did not mention that Smith owned or had a mortgage on the Dighton property. Meritage approved the loan.

As on the previous occasion, Smith met Taylor and Bertucci at the RKelley-Law office on the day of the closing. Foley was also present. She introduced herself to Smith, gave him her business card, and assured him that everything would be "all right." Taylor, Bertucci, and Foley led Smith to believe that he was making another good investment, and he trusted them. Bertucci placed a stack of papers in front of Smith for his signature without explaining their contents. Smith again signed the documents without reading them, unwittingly borrowing $437, 198.13 for the purchase of the Boston property, secured by two mortgages from Meritage.

Several days after the second closing, Taylor gave Smith $9, 000 as his share. Jenkins received a "contract release fee" of $41, 500, and Century 21 received a broker's commission of $18, 950. Both Foley and Adamos received a share of Century 21's commission, Foley as the listing agent and Adamos as the selling agent.

A number of months after the closings, Smith began receiving calls from the lenders on a daily basis regarding missed mortgage payments. Taylor at first assured him that this was no cause for concern, while Jenkins avoided his calls. The two properties were eventually foreclosed on. In the meantime, Smith's mental health deteriorated. The severity of the voices in his head worsened. He became suicidal and withdrew from the company of those close to him. Because his credit was ruined, he was unable to rent an apartment or obtain new credit cards.

C. Court Proceedings

Smith filed a complaint in Massachusetts state court against the various entities and individuals involved in the scheme. He alleged a host of state claims, including fraud, breach of fiduciary duty, and violation of the Massachusetts Consumer Protection Statute, see Mass. Gen. Laws ch. 93A, and two federal claims for violations of the Truth in Lending Act ("TILA"), see 15 U.S.C. § 1635(e), and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), see 18 U.S.C. §§ 1961-1969. The defendants removed the case to the federal court.

The district court dismissed a number of claims and disposed of others, including the two federal claims, through summary judgment.[1] The surviving claims of fraud (against RE/MAX, Century 21, NEMCO, Union Capital, Bertucci, and Jenkins) and breach of fiduciary duty (against RE/MAX, Century 21, NEMCO, and Union Capital) were tried before a jury.[2] The court reserved ruling on the Chapter 93A claim until after trial. The jury found for Smith except as against RE/MAX and awarded damages totaling $260, 000, apportioned among the remaining defendants.

Century 21, NEMCO, and Union Capital moved for judgment as a matter of law or, in the alternative, for a new trial. The court denied the motions of Century 21 and NEMCO but granted Union Capital's motion on sufficiency-of-the-evidence grounds.

The court then issued a split decision on Smith's Chapter 93A claim. It dismissed the claim against Century 21 and Union Capital, ruling that Smith had failed to comply with the demand letter requirement, see Mass. Gen. Laws ch. 93A, § 9(3). Finding that Jenkins, Bertucci, and NEMCO had violated the act, the court awarded Smith treble damages against Jenkins and Bertucci, double damages against NEMCO, and attorneys' fees.

Century 21 and NEMCO timely appealed, and Smith cross-appealed the dismissal of several claims.

II. A. Century 21

The jury found Century 21 liable to Smith for fraud and breach of fiduciary duty and awarded $50, 000 in damages for those claims. The district court denied Century 21's post-trial motions challenging the verdict on sufficiency-of-the-evidence grounds and assigning error to ...


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