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CGC Holding Co., LLC v. Broad and Cassel

United States Court of Appeals, Tenth Circuit

December 8, 2014

CGC HOLDING COMPANY, LLC, a Colorado limited liability company; CRESCENT SOUND YACHT CLUB, LLC, a Florida limited liability company; HARLEM ALGONQUIN LLC, an Illinois limited liability company; and JAMES T. MEDICK, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees,
v.
BROAD AND CASSEL, a Florida general partnership; RONALD GACHÉ; and CARL ROMANO, Defendants-Appellants. CGC HOLDING COMPANY, LLC, a Colorado limited liability company; CRESCENT SOUND YACHT CLUB, LLC, a Florida limited liability company; HARLEM ALGONQUIN LLC, an Illinois limited liability company; and JAMES T. MEDICK, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees,
v.
SANDY HUTCHENS, also known as Fred Hayes, also known as Moishe Alexander, also known as Moshe Ben Avraham; TANYA HUTCHENS; JENNIFER HUTCHENS, also known as Jennifer Araujo; H. JAN LUISTERMANS, also known as Herman Luisterman; 1681071 ONTARIO INC., an Ontario corporation which has changed its name to Canadian Funding Limited; NORTHERN CAPITAL INVESTMENTS LTD, an Ontario corporation; 2800 NORTH FLAGLER DRIVE UNITS 106-107 LLC, a Florida limited liability company; ESTATE OF JUDITH HUTCHENS; 129 LAREN STREET INC., an Ontario corporation, also known as 2141250 Ontario Inc.; 3415 ERRINGTON AVENUE INC., an Ontario corporation, also known as 2129974 Ontario Inc.; 367-369 HOWEY DRIVE INC., an Ontario corporation, also known as 1714530 Ontario Inc.; 3419 ERRINGTON AVENUE INC., an Ontario corporation, also known as 2129982 Ontario Inc.; 17 SERPENTINE STREET INC., an Ontario corporation, also known as 1714529 Ontario Inc.; 720 CAMBRIAN HEIGHTS INC., an Ontario corporation, also known as 2154461 Ontario Inc.; 331 REGENT STREET INC., an Ontario corporation, also known as 2126929 Ontario Inc.; 789 LAWSON STREET INC., an Ontario corporation, also known as 2128417 Ontario Inc.; 110-114 PINE STREET INC., an Ontario corporation, also known as 2173061 Ontario Inc.; 15-16 KEZIAH COURT INC., an Ontario corporation, also known as 2128412 Ontario Inc.; 193 MOUNTAIN STREET INC., an Ontario corporation, also known as 2141249 Ontario Inc.; 625 ASH STREET INC., an Ontario corporation, also known as 2128413 Ontario Inc.; 364 MORRIS STREET INC., an Ontario corporation, also known as 2119821 Ontario Inc.; SANTAN PROPERTY MANAGEMENT INC.; 101 SERVICES ROAD INC.; 146 WHITAKER STREET INC., an Ontario corporation; JBD HUTCHENS FAMILY HOLDINGS INC., an Ontario corporation, also known as 2129981 Ontario Inc.; JBD HOLDINGS; 1697030 ONTARIO INC., Defendants-Appellants, And 308 ELGIN STREET INC.; 1539006 ONTARIO INC.; FIRST CENTRAL HOLDINGS INC.; FIRST CENTRAL MORTGAGE FUNDING INC.; CANADIAN FUNDING CORPORATION; REALTY 1 REAL ESTATE SERVICES LTD., Defendants. CGC HOLDING COMPANY, LLC, a Colorado limited liability company; CRESCENT SOUND YACHT CLUB, LLC, a Florida limited liability company; HARLEM ALGONQUIN LLC, an Illinois limited liability company; and JAMES T. MEDICK, on behalf of the themselves and all others similarly situated, Plaintiffs-Appellees,
v.
ALVIN MEISELS, Defendant-Appellant

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APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO. (D.C. No. 11-cv-01012-RBJ-KLM).

James D. Kilroy (Jessica E. Yates with him on the briefs), Snell & Wilmer L.L.P., Denver, Colorado, for Case No. 13-1255 Appellants.

Steven A. Klenda, Adroit Advocates, LLC, Denver, Colorado, for Case No. 13-1257 Appellants.

John M. Palmeri (Heather K. Kelly and Greg S. Hearing with him on the briefs), Gordon & Rees LLP, Denver, Colorado, for Case No. 13-1258 Appellants.

John F. Head, Head & Associates, P.C., Denver, Colorado, for Appellees.

Before, KELLY[*], TYMKOVICH and PHILLIPS, Circuit Judges.

OPINION

Page 1080

TYMKOVICH, Circuit Judge.

This case requires us to consider the certification of a proposed class action to pursue claims under the Racketeer Influenced and Corrupt Organizations Act (RICO). A class primarily composed of real estate borrowers sued a group of lenders, claiming the lenders conspired to create a fraudulent scheme to obtain non-refundable up-front fees in return for loan commitments the lenders never intended to fulfill.

On behalf of the proposed class, the class representatives--Colorado Golf Club

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Holding Company LLC (CGC Holding), Harlem Algonquin LLC and James T. Medick[1]--allege that the lenders misrepresented their ability and their objective to make good on the promises to meet certain financing obligations as part of a scheme to entice borrowers to pay the up-front fees. In addition, the class intends to offer generalized proof that the lenders concealed the financial history of Sandy Hutchens, the principal defendant, and his use of pseudonyms, to preserve the superficial integrity of the operation. Had they known about this pretense, say the borrowers, no putative class member would have taken part in the financial transactions that caused each to lose its up-front fees, amounting to millions of dollars of cumulative losses.

The lenders oppose class certification under Rule 23 of the Federal Rules of Civil Procedure. They contend class action is an inappropriate litigation vehicle because the borrowers are unable to demonstrate that common issues susceptible to generalized proof will predominate over any issues affecting class members individually. In particular, the lenders contend that each class member will have to demonstrate that it relied on the lenders' misrepresentations or omissions to satisfy RICO's causation element, making a single trial unwieldy and unworkable.

The lenders are wrong, but not because plaintiffs benefit from a legal " presumption" of reliance as identified by the district court. As we explain, RICO class-action plaintiffs are not entitled to an evidentiary presumption of a factual element of a claim. But still we agree with the district court that a class can be certified in this context. The plaintiffs' theory of the case rests on a straightforward premise--that no rational economic actor would enter into a loan commitment agreement with a party they knew could not or would not fund the loans. Accordingly, plaintiffs' payment of up-front fees allows for a reasonable inference that the class members relied on lenders' promises, which later turned out to be misrepresentations or omissions of financial wherewithal. This theory sufficiently allays concerns about Rule 23(b)(3)'s requirement that common issues predominate over those idiosyncratic to individual class members.

And with the predominance requirement met, the borrowers have sufficiently proved each of the elements required to certify a class under Rule 23. For this reason, the district court thus did not err in certifying the class. The defendants associated with the lenders' law firm, however, are an exception. For that subset of the defendants, we reverse because plaintiffs concede that they lack standing to pursue claims involving the law firm.

Exercising jurisdiction under Rule 23(f), we AFFIRM the class certification decision on modified grounds. We also REVERSE the district court's class certification decision as to the lenders' law firm and lawyers, Broad and Cassel, Ronald Gachéand Carl Romano, and REMAND with instructions to DISMISS the claims against those defendants.

Finally, because several claims are not properly before us in this interlocutory appeal, we decline to address (1) whether plaintiffs' claims constitute an impermissible extraterritorial application of RICO, (2) whether the plaintiffs can prove proximate cause, or (3) whether the district court properly exercised personal jurisdiction over certain defendants.

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I. Background

A. Hutchens and the Alleged Fraud

We take the facts as alleged in the complaint. The complaint alleges that Sandy Hutchens was the mastermind behind the loan commitment fraud at the heart of this case. Plaintiffs contend Hutchens is a career criminal with a history of schemes similar to the one at issue here. In 2004, Hutchens pleaded guilty to financial fraud charges in Canada and was sentenced to two years of house arrest followed by two years of probation.[2] For reasons that become relevant later, after his Canadian conviction, Hutchens converted to orthodox Judaism and changed his name to Moishe Alexander Ben Avraham. In addition to the moniker Moishe Alexander, Hutchens maintained several other aliases to conceal his identity, including Moishe Alexander ben Avrohom, Moshe Ben Avraham, Fred Hayes, Alexander MacDonald, Matthew Kovce, and Frederick Merchant.[3] Not surprisingly, Hutchens disagrees with the plaintiffs' characterization of his operation and contends that he was a legitimate financial investor and lender with success closing mortgage transactions, asset purchases, and other investments.

Plaintiffs' central claim is that Hutchens and his associates engaged in a common scheme to defraud distressed, do-or-die borrowers out of up-front payments. The formula for Hutchens's alleged cookie-cutter scheme is not complicated. First, a potential borrower would submit a loan application to one of several issuing entities through a loan broker. Typically, the applicant would identify in its application a piece of real estate that could serve as collateral to secure the loan. After receiving the application, an issuing entity would extend the applicant a loan commitment agreement. Under its terms, the applicant was required to pay, among other advanced fees, an up-front, non-refundable payment known as a " loan commitment fee." In addition to this up-front fee, as a strict condition of the terms of the agreement, the applicant was also required to meet certain eligibility requirements prior to receiving the loan. One of these conditions set a minimum valuation for the collateral property. If an appraisal valued the property below the amount necessary to secure the loan, then the commitment agreement would be annulled. Another condition required that the applicant timely submit necessary paperwork to facilitate the loan's approval. At some point in the process, the issuing entities terminated each of the borrowers' loan commitment agreements for failing, in one form or another, to comply with the conditions of the agreement.

Plaintiffs claim this scheme was subterfuge for a scam to appropriate the up-front fees without any intent or ability to ultimately fund the committed loan. To this end, Hutchens and his cohorts would fabricate a reason to deny the loan or otherwise blame the borrower for the deal's dissolution. According to Hutchens's former accountant, Martin Lapedus, by the end of 2009 the issuing entities controlled by Hutchens had received over $8 million in up-front fees from applicants, but had lent

Page 1083

less than $500,000 in total funding. Furthermore, Lapedus alleges that the issuing entities, and by extension Hutchens, never had the liquidity to close the substantial loans committed to in the loan agreements.

Plaintiffs also allege that Hutchens and his syndicate concealed several material aspects of Hutchens's criminal or otherwise problematic past, including his use of aliases to perpetuate false perceptions and obscure his identity. In the same vein, plaintiffs allege that the physical addresses associated with the issuing entities were façades used to shield the illusory nature of Hutchens's business. At bottom, plaintiffs contend that this deceit amounted to an effort to beguile class members, ignorant of Hutchens's unsavory methods, to enter the loan commitment agreements. But for these active omissions and misrepresentations, say plaintiffs, no putative class member would have participated in the deals.

B. Other Defendants

Plaintiffs also claim a number of other individuals and entities conspired with Hutchens.

1. The Hutchens Family and Related Entities

First, plaintiffs allege Hutchens's wife, Tanya, and his daughter, Jennifer, are co-conspirators. They claim Tanya Hutchens as the person responsible for operating and maintaining the books of the fraudulent enterprise. She also controlled the majority of the entities to which the enterprise funneled the ill-gotten gains of their alleged scheme. Jennifer Hutchens (or Jennifer Araujo) was the " Manager of Underwriting" for several of the corporate entities.

Plaintiffs next contend H. Jan Luistermans is a Canadian real estate agent who worked with the Hutchens's enterprise. His primary responsibility was inspecting potential borrowers' properties to determine whether the property could serve as acceptable collateral for the loans. During the relevant time period, Luistermans was employed by Realty 1 Real Estate Services Ltd.

Additionally, the complaint named five issuing entities as defendants. The issuing entities--308 Elgin Street Inc. (308 Elgin), Canadian Funding Corporation (CFC), First Central Mortgage Funding Inc. (FCMF), Northern Capital Investment Ltd. (NCI), and Great Eastern Investment Fund, LLC (GEIF)--are all Canadian corporations that allegedly served as vehicles to issue the conditional loan commitments and accept the up-front fees required to secure those commitments. A sixth entity, First Central Holdings Inc. (FCH), served a similar function, allegedly receiving payments via wire transfers from class members. Finally, Hutchens and his associates used another cadre of entities, collectively referred ...


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