Rothstein v. Gmac Mortg., LLC

LANDON ROTHSTEIN, ET AL., Plaintiffs, v. GMAC MORTGAGE, LLC, ET AL., Defendants.

12 Civ. 3412 (AJN)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Dated: September 30, 2013

OPINION AND ORDER

ALISON J. NATHAN, District Judge:

Currently before the Court is a motion to dismiss the Second Amended Complaint ("SAC," or the "Complaint"), pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6), filed by a group of Defendants in the above-captioned case. See Dkt. No. 44; see also Fed. R. Civ. P. 12(b). This group of Defendants consists of Balboa Insurance Company ("BIC"), MeritPlan Insurance Company ("MIC"), and Newport Management Company ("NMC") (collectively, the "Balboa Defendants" or "Balboa"). The Balboa Defendants seek to dismiss claims brought by Plaintiffs Landon Rothstein, Jennifer and Robert Davidson, and Ihor Kobryn, on behalf of themselves and a putative class of similarly situated residential mortgage loan borrowers who were charged for lender-placed insurance in connection with loans serviced by GMAC Mortgage LLC ("GMACM"). Plaintiffs allege, inter alia,¹ violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961, et seq. ("RICO"), and the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601, et seq. ("RESPA"). The Balboa Defendants move to dismiss Plaintiffs' claims on the basis that: (1) they are barred by the filed rate doctrine; and (2) the allegations against the Balboa Defendants fail to state a claim upon which relief may be granted. For the reasons discussed herein, the Balboa Defendants' Motionto Dismiss, Dkt. No. 44, is granted in part and denied in part.

I. STANDARD OF REVIEW

"In resolving a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), 'the court must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff.'" Guan N. v. NYC Dep't of Educ., No. 11 Civ. 4299 (AJN), 2013 WL 67604, at *2 (S.D.N.Y. Jan. 7, 2013) (quoting Natural Res. Def. Council v. Johnson, 461 F.3d 164, 171 (2d Cir. 2006)). However, "jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it." APWU v. Potter, 343 F.3d 619, 623 (2d Cir. 2003); see also Amidax Trading Grp. v. S. W.I.F.T. SCRL, 671 F.3d 140, 145 (2d Cir. 2011) ("[Plaintiff] must allege facts that affirmatively and plausibly suggest that it has standing to sue.").

In contrast, "[w]hen deciding a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), the Court must accept as true all well-pleaded facts and draw all reasonable inferences in the light most favorable to the non-moving party." Guan N., 2013 WL 67604, at *2 (citing Kassner v. 2nd Ave. Delicatessen, Inc., 496 F.3d 229, 237 (2d Cir. 2007)). To survive a motion to dismiss, the complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. A complaint containing nothing more than "a formulaic recitation of the elements of a cause of action" is insufficient, and the Court need not assume the truth of mere conclusory statements. Id.

"In addition to the allegations of the pleading itself, the Court may consider documentsattached as exhibits or incorporated by reference." TufAmerica, Inc. v. Diamond, No. 12 Civ. 3529 (AJN), 2013 WL 4830954, at *1 (S.D.N.Y. Sept. 10, 2013) (citing Halebian v. Berv, 644 F.3d 122, 131 n.7 (2d Cir. 2011); and Chapman v. NY. State Div. for Youth, 546 F.3d 230, 234 (2d Cir. 2008)). "The Court may also take judicial notice of filings with government agencies that are a matter of public record." Roussin v. AARP, Inc., 664 F. Supp. 2d 412, 415 (S.D.N.Y. 2009), aff'd 379 F. App'x 30 (citing Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 75 (2d Cir. 1998) (noting that a "district court may rely on matters of public record in deciding a motion to dismiss under Rule 12(b)(6)"); and Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) (documents publicly filed with the SEC may be considered on a motion to dismiss)). "If a document relied on in the complaint contradicts allegations in the complaint, the document, not the allegations, control, and the court need not accept the allegations in the complaint as true." Poindexter v. EMI Record Grp. Inc., No. 11 Civ. 559 (LTS), 2012 WL 1027639, at *2 (S.D.N.Y. Mar. 27, 2012) (citing Barnum v. Millbrook Care Ltd. P'ship, 850 F. Supp. 1227, 1232-33 (S.D.N.Y. 1994)).

II. BACKGROUND

In their Complaint, Plaintiffs allege that Defendants engaged in unlawful practices relating to the somewhat complicated lender-placed insurance process. Because of the nature of this process, there is some benefit to first providing a hypothetical example of how the process generally functions before addressing Plaintiffs' allegations regarding Defendants' actions relative to the process.

In this hypothetical example, an imaginary couple, Alex and Carol, decide to purchase a residential home. They go to a lender, Bank, who issues them a mortgage. The terms of that mortgage provide that, if Alex and Carol do not maintain hazard insurance on their home, Bank,as the lender, can purchase hazard insurance and bill the cost to Alex and Carol. Aptly, this product is called lender-placed insurance ("LPI").

The idea behind LPI is that, although Alex and Carol live in the home, Bank maintains an interest in their home, in the amount of the unrepaid portion of the mortgage that could be lost in the event of a hazard. Bank is not, however, concerned about or required to insure Alex and Carol's principal or belongings. As is custom though, instead of Bank owning the interest in Alex and Carol's mortgage, it securitizes the mortgage and sells it to a securitization trust, Trust, which then owns the legal title to the mortgage and is the party interested in assuring that the home is insured. Trust, in turn, hires Servicer to manage day-to-day details (like insurance) regarding the mortgages. Servicer, in turn, may hire Subcontractor to undertake some of the tasks that Trust hired Servicer to perform.

Alex and Carol, meanwhile, allow their hazard insurance to lapse. Subcontractor, who is keeping tabs on their mortgage, gets wind of this and sends them a notice reminding them of their obligation to maintain hazard insurance and informing them that, if they don't rectify the situation, Servicer will purchase LPI at a specific rate and that LPI may be more expensive than private insurance and may not cover their principal, equity or belongings. Despite the warning, Alex and Carol do not remedy the situation. As a result, Servicer exercises Trust's right, pursuant to the mortgage agreement, and purchases LPI from Insurer. After Insurer bills Servicer, Servicer (through Subcontractor) tells Alex and Carol that it has purchased LPI for their property and that the amounts it paid for the LPI are now included in their mortgage.

With that general overview in mind, the Court turns to Plaintiffs' allegations here.

III. FACTS²

In this case, Plaintiffs, and the members of their putative class (individuals like Alex and Carol, in the above hypothetical), allege that, since at least March 2003, GMACM (Servicer) and BIC/MIC (Insurer), engaged in fraudulent activity related to the above-described system, and that, as a result, Plaintiffs were unlawfully overbilled for LPI. Specifically, Plaintiffs allege that GMACM -- the fifth largest residential loan servicer in the United States -- had an agreement with BIC/MIC whereby GMACM would purchase LPI for the loans it serviced from BIC/MIC and that BIC/MIC would then provide GMACM with kickbacks. According to Plaintiffs, these kickbacks came in two forms: first, GMACM hired NMC (Subcontractor), an affiliate/agent of BIC/MIC, to perform GMACM's "insurance tracking," but BIC/MIC secretly paid NMC's bills for GMACM, thus providing NMC's subcontractor services to GMACM for free; and second, BIC/MIC would funnel a portion of the LPI payments that it received from GMACM to a third party, John Doe, who would covertly return those amounts to GMACM. Notwithstanding having received these kickbacks, GMACM would then bill Plaintiffs for the full cost of the LPI it had originally paid to BIC/MIC, rather than billing them for the post-kickback cost that GMACM had effectively paid for that LPI.

Plaintiffs allege that Defendants and GMACM constituted a RICO "enterprise," the purpose of which was to defraud borrowers, like Plaintiffs, by inducing them to pay overpriced LPI with respect to GMACM-serviced loans. SAC ¶¶ 253-55. Plaintiffs recognize that the original cost for the LPI that GMACM purchased from BIC/MIC was calculated using rates that had been filed with, and approved by, the relevant state insurance regulator. Plaintiffs claim, however, that Defendants fraudulently misrepresented the fact that the costs billed did not, in fact, reflect the costs that GMACM had actually paid for the LPI. Specifically, they claim thatstatements in the letters -- describing the LPI charges as "[t]he cost of the insurance" that was "advanced," and calling the relevant payments "reimburs[ments]" -- were materially false and intended to trick the borrower into believing that they were billed the same amount as BIC/MIC paid. In relevant part, Plaintiffs claim that Defendants' actions were in violation of the RICO and RESPA statutes. Additional facts will be discussed within the body of this opinion as they become relevant.

IV. DISMISSAL UNDER THE FILED RATE DOCTRINE

As noted, the Balboa Defendants argue that Plaintiffs' claims should be dismissed pursuant to what is called the ...