SANDRA VAN DEN BROECK, an individual v. Common Point Mortgage Company , fka Anderson Realty, Inc., fka Allstate Mortgage &…

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0153P (6th Cir.)
File Name: 00a0153p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
S ANDRA VAN DEN BROECK, an
individual; EUGENE
NICHOSON and C AROL
NICHOSON , husband and wife;
ABEL S OTO and DENISE
S OTO , husband and wife,
Plaintiffs and Class
Representatives-Appellants,
v.
C OMMON P OINT M ORTGAGE
C OMPANY , fka Anderson
Realty, Inc., fka Allstate
Mortgage & Financial
Corporation, fka AAA
Mortgage & Financial
Corporation, d/b/a
CommonPoint Mortgage;
M ICHAEL ANDERSON , an
individual,
Defendants-Appellees.
;>

1
No. 98-2266
Appeal from the United States District Court
for the Western District of Michigan at Grand Rapids.
No. 97-00826—Gordon J. Quist, District Judge.

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2 VanDenBroeck, et al. v. CommonPoint
Mortgage Co., et al.
No. 98-2266
1Section 1962(c) of the Racketeer Influenced and Corrupt
Organizations Act provides that “[i]t shall be unlawful for any person
employed by or associated with any enterprise . . . to conduct . . . such
enterprise’s affairs through a pattern of racketeering activity . . . .” 18
U.S.C. § 1962(c) (1999) (emphasis added).
Argued: March 16, 2000
Decided and Filed: May 1, 2000
Before: MERRITT, NELSON, and DAUGHTREY,Circuit
Judges.
_________________
COUNSEL
ARGUED: John E. Anding, DREW, COOPER & ANDING,
Grand Rapids, Michigan, for Appellants. John C. Englander,
GOODWIN, PROCTOR & HOAR, Boston, Massachusetts,
for Appellees. ON BRIEF: John E. Anding, Christopher G.
Hastings, DREW, COOPER & ANDING, Grand Rapids,
Michigan, for Appellants. John C. Englander, James W.
McGarry, GOODWIN, PROCTOR & HOAR, Boston,
Massachusetts, Thomas M. Hefferon, GOODWIN,
PROCTOR & HOAR, Washington, D.C., for Appellees.
_________________
OPINION
_________________
MERRITT, Circuit Judge. This is a section 1962(c) RICO
fraud case,1 brought by borrowers who allege that the
defendant lender, CommonPoint Mortgage Company,
engaged in a pattern of racketeering activity consisting of mail
and wire fraud. The gist of the case is that the lender’s
undisclosed fees were unreasonable. The appeal arises from
the district court’s decision to grant the lender’s motion to
No. 98-2266 VanDenBroeck, et al. v.
CommonPoint Mortgage Co., et al.
11
particularity” which would show either intent to defraud or
reliance on the alleged misrepresentation. While in some
cases intent can be inferred from the facts, the differing
definitions of “loan discount” and “discount point” clearly
indicate that intent cannot be inferred in this case. There may
have been some confusion about the meaning of “points” and
“discount,” but such confusion does not amount to fraud.
Likewise, reliance cannot be inferred from the mere act of
entering into the transaction because plaintiffs simply wanted
a loan, and there is no showing that they expected a below-
market rate. In light of the fact that the borrowers had
questionable credit, could not get loans from regular lenders,
and had to turn to a “subprime” lender, there is no basis for
the proposition that they expected a below-market rate.
Although the district court declined to reach this issue, we
may affirm the district court’s opinion on different grounds.
See Brown v. Tidwell, 169 F.3d 330, 332 (6th Cir. 1999). We
find that plaintiffs have failed to plead the elements of fraud
with sufficient specificity, having failed to allege or proffer
any evidence showing an intentional misrepresentation and
reliance thereon. We therefore hold that plaintiffs have failed
to adequately allege or proffer evidence of the predicate acts
of mail fraud and wire fraud which form the basis of their
RICO claim. Accordingly, we AFFIRM the decision of the
district court on this ground.

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10 VanDenBroeck, et al. v. CommonPoint
Mortgage Co., et al.
No. 98-2266
within a fiduciary relationship as well as in other
circumstances. See, e.g., Kenty v. Bank One, Columbus, N.A.,
92 F.3d 384 (6th Cir. 1996) (applying the elements of fraud
to the RICO claim of a car buyer against the bank who
financed his car purchase).
Plaintiffs allege that CommonPoint made a material
misrepresentation to its customers when it charged a “loan
discount” without providing a corresponding decrease in their
interest rate. They rely upon the glossary of terms which
defendants provided to their customers. That glossary defines
a “discounted loan” to mean that “[w]hen the note rate on a
loan is less than the market rate, the lender requires additional
points to raise the yield on the loan to the market rate.” J.A.
at 238. In addition, plaintiffs argue that a HUD pamphlet for
buyers defines a “loan discount” as a “one time charge
imposed by the lender or broker to lower the rate at which the
lender or broker would otherwise offer the loan to you.” J.A.
at 259.
In response, defendants argue that the “loan discount”--
which was charged directly beneath the designated loan
origination fee on the standard form loan agreement
CommonPoint employed--is simply a form of points like an
origination fee assessed to cover the administrative costs of
the loan. For proof of this, they offer the same two
documents which plaintiffs brought to the attention of the
court. First, they argue that the glossary used by
CommonPoint also included a definition of a “discount point”
which was an “[a]mount payable to the lending institution by
the borrower or seller to increase the lender’s effective yield.
One point is equal to one percent of the loan amount.” J.A.
at 238. In addition, they argue that the same HUD pamphlet
relied on by plaintiffs points out that the term “loan discount”
is often also called “points” or “discount points.” J.A. at 259.
It seems doubtful that the use of the language “loan
discount” was a misrepresentation under these circumstances,
but it is clear that plaintiffs have failed to allege facts “with
No. 98-2266 VanDenBroeck, et al. v.
CommonPoint Mortgage Co., et al.
3
dismiss with respect to the RICO claim and the several Truth
in Lending Act claims of the plaintiffs. In addition, Judge
Quist denied the plaintiffs’ motion for leave to amend the
complaint to include an additional Truth in Lending Act claim
and to correct any deficiencies in the existing claims.
Plaintiffs now appeal the court’s decision to dismiss their
RICO claim, and further appeal the district court’s denial of
their motion to amend the complaint to correct any
deficiencies which the court found. Plaintiffs do not appeal
the decision to dismiss the original Truth in Lending Act
claims. The district court dismissed the RICO claim on the
ground that the complaint failed to allege a proper RICO
“enterprise” and did not reach the question of whether the
complaint properly alleged fraud. We agree with the district
court that the “enterprise” element of the RICO tort is
defective, but we think this defect could be remedied by
amendment. The fraud element is also defective, and we
conclude that it cannot be remedied by amendment. Hence
we affirm the judgment of the district court.
I. Allegations of Complaint
Plaintiffs, as representatives of their class, are several
customers of CommonPoint Mortgage Company.
CommonPoint Mortgage is a so-called “subprime” lender,
which makes loans for people with poor credit who have
difficulty obtaining them on their own and then sells the loans
in the secondary market. CommonPoint routinely asked their
customers to sign a “financial services agreement.” That
agreement provided that CommonPoint would do its best to
obtain a loan, and if a loan was provided by a third party,
CommonPoint would be entitled to a fee from the customer
equal to a certain percentage of the principal of the loan. The
allegation and general theory of plaintiffs’ case is that the
“financial services agreement” made CommonPoint the agent
or fiduciary of a customer for the purpose of securing a loan
from a third party, but that CommonPoint in fact made the
loan itself rather than seeking a third party lender, and
charged “unconscionable and hidden fees” in the process of

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4 VanDenBroeck, et al. v. CommonPoint
Mortgage Co., et al.
No. 98-2266
doing so. Plaintiffs contend that some of CommonPoint’s
customers were charged front-end “discount fees,” which
were typically 2-5% of the loan amount in the instances in
which they were charged. In the case of class representative
VanDenBroeck, for instance, the discount fee was 5% of the
loan amount on her $63,000 loan, or $3,150, which was
similar to the origination fee charged. Plaintiffs allege that
these so-called “discount fees” are supposed to insure lower
interest rates, but that CommonPoint not only failed to
actually lower the interest rates, it routinely inflated the
interest rate even though a lower interest rate could have been
obtained. The interest rates charged the class representatives
in this case ranged from 13-16%. In response to this
allegation, defendant argues that the “discount fees” were
really only typical “points” or origination fees assessed as a
normal byproduct of obtaining a loan, and were in no way
fraudulent. After closing on the loans, CommonPoint
routinely sold the loans to one of a number of secondary
market lenders who paid CommonPoint a fee based upon the
difference between CommonPoint’s loan rate and the
secondary lender’s rate for the same loan. This was referred
to as the “upsell” or “backend fee.” Plaintiffs further allege
that the interest rates ultimately received often exceeded the
interest rates promised in the financial services agreement,
and that defendant failed to inform plaintiffs that the loans
were made at a higher rate than could have been obtained.
II. The “Enterprise”
Plaintiffs claimed that this scheme between CommonPoint
and the secondary lenders with which it dealt constituted a
RICO association-in-fact “enterprise” under 18 U.S.C.
§ 1962(c) (1999) (see footnote 1 for text of § 1962(c)). In
order to prove a violation of that Act, the plaintiffs must show
1) that there were two or more predicate offenses; 2) that an
“enterprise” existed; 3) that there was a nexus between the
pattern of racketeering activity and the enterprise; and 4) that
an injury to business or property occurred as a result of the
above three factors. See Frank v. D’Ambrosi, 4 F.3d 1378,
No. 98-2266 VanDenBroeck, et al. v.
CommonPoint Mortgage Co., et al.
9
fraud claim to determine whether plaintiff has alleged the
elements of fraud with sufficient specificity to allow this case
to proceed.
IV. Sufficiency of Allegations of Fraud
According to Rule 9(b) of the Federal Rules of Civil
Procedure, in a complaint alleging fraud “the circumstances
constituting fraud . . . shall be stated with particularity.” See
Advocacy Organization for Patients and Providers v. Auto
Club Insurance Assoc., 176 F.3d 315, 322 (6th Cir. 1999). In
this case, plaintiffs argue that mail fraud and wire fraud are
the predicate acts which form the basis of their RICO claim.
Mail fraud and wire fraud are proven by showing a scheme or
artifice to defraud combined with either a mailing or an
electronic communication for the purpose of executing the
scheme.
We have defined a scheme to defraud as “‘intentional fraud,
consisting in deception intentionally practiced to induce
another to part with property or to surrender some legal right,
and which accomplishes the designed end.’” Kenty v. Bank
One, Columbus, N.A., 92 F.3d 384, 389-90 (6th Cir. 1996)
(quoting Bender v. Southland Corp., 749 F.2d 1205, 1215-16
(6th Cir. 1984)). In other words, in order to present a
cognizable claim for fraud, the plaintiffs must show that
CommonPoint Mortgage made a material misrepresentation
of fact that was calculated or intended to deceive persons of
reasonable prudence and comprehension, and must also show
that plaintiffs in fact relied upon that material
misrepresentation. See id. at 390.
Plaintiff argues that due to the agency or “fiduciary” nature
of the relationship between CommonPoint and its customers--
wherein CommonPoint was to act as the customers’ agent for
the purpose of securing a loan--plaintiff is relieved of the
burden of proving intent and reliance and must only prove a
misrepresentation of fact. That argument is meritless. Our
cases make clear that the elements of fraud must be proven

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8 VanDenBroeck, et al. v. CommonPoint
Mortgage Co., et al.
No. 98-2266
that the corporation itself constituted the enterprise, plaintiffs
expressed concern that some Circuits have held that a sole
shareholder of a corporation cannot be considered sufficiently
distinct from the corporation itself to justify a holding that he
was “conspiring” with the corporation. According to this way
of conceptualizing the sole shareholder’s status under RICO,
a sole shareholder is equivalent to the corporation he owns
and therefore he cannot conspire with himself. Mr. Anderson
is the sole shareholder, President, and Treasurer of
CommonPoint Mortgage.
This concern is misplaced. In Fleischhauer v. Feltner, 879
F.2d 1290 (6th Cir. 1989), we adopted the holding of United
States v. Feldman, 853 F.2d 648 (9th Cir. 1988). In Feldman,
the Ninth Circuit held that a sole shareholder was sufficiently
distinct from his corporation by virtue of both the legal shield
which the corporate form provides as well as the existence of
employees and activities apart from the sole shareholder. The
court concluded that a RICO ‘person’ can be the sole
shareholder in a corporate ‘enterprise’ which forms the basis
of a RICO action. See Feldman, 853 F.3d at 656. That court
further concluded that a defendant who is the sole shareholder
in each of several corporations associated-in-fact could also
form the basis for a RICO action. See Feldman, 853 F.3d at
656.
We adopted the second holding of the Feldman case, which
necessarily included the first holding. See Fleischhauer, 879
F.2d at 1297 (“[T]he fact that Feltner owned 100% of the
corporations’ shares does not vitiate the fact that these
corporations were separate legal entities.”) The district court
did not err because it was not presented with this theory of
enterprise liability, but we do conclude that amendment
would not be futile in this case, based on the fact that
plaintiffs could allege that CommonPoint Mortgage alone was
the enterprise which was engaged in a pattern of racketeering
activity. Given that plaintiffs perhaps should now be allowed
to amend on the enterprise element if they otherwise have a
plausible case, we will address the merits of the underlying
No. 98-2266 VanDenBroeck, et al. v.
CommonPoint Mortgage Co., et al.
5
1385 (6th Cir. 1993). In addition, the Supreme Court has held
that in order to be held responsible under the Act, a defendant
must have not only participated in the scheme, but must have
also participated in the operation or management of the
enterprise itself. See Reves v. Ernst & Young, 507 U.S. 170,
183 (1993); see also Stone v. Kirk, 8 F.3d 1079, 1091 (6th
Cir. 1993). The district court dismissed plaintiff’s RICO
claim for failure to show the existence of an “enterprise” and
failure to show that defendants exerted control over an
“enterprise,” and therefore declined to address the further
allegation that plaintiffs had failed to adequately allege that
defendants committed the predicate acts of federal mail and
wire fraud.
The Supreme Court has defined an “enterprise” under the
Act as a “group of persons associated together for a common
purpose of engaging in a course of conduct.” United States v.
Turkette, 452 U.S. 576, 583 (1981). An association-in-fact
enterprise can be proven by showing 1) that the associated
persons formed an ongoing organization, formal or informal;
2) that they functioned as a continuing unit; and 3) that the
organization was separate from the pattern of racketeering
activity in which it engaged. See Frank v. D’Ambrosi, 4 F.3d
1378, 1386 (6th Cir. 1993).
The association-in-fact enterprise alleged to exist in this
case includes CommonPoint and its relationship with the
numerous secondary lenders to which it sells customers’
loans. The district court correctly recognized that the
elements outlined above have been interpreted to require a
certain amount of organizational structure which eliminates
simple conspiracies from the Act’s reach. That is, simply
conspiring to commit a fraud is not enough to trigger the Act
if the parties are not organized in a fashion that would enable
them to function as a racketeering organization for other
purposes. Plaintiffs’ brief agrees, noting that the “hallmark of
a RICO enterprise is its ability to exist apart from the pattern
of wrongdoing.” Brief for Appellant at 13. All that is

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6 VanDenBroeck, et al. v. CommonPoint
Mortgage Co., et al.
No. 98-2266
required is some minimal level of organizational structure
between the entities involved.
The district court noted that four steps were undertaken in
the current scheme. First, CommonPoint obtained the
borrower. Second, a secondary lender determined an interest
rate at which it would make a loan. Third, CommonPoint
made a loan to the borrower at a different rate based on the
secondary lender’s proposed interest rate. Fourth, the loan
was sold to the secondary lender and CommonPoint collected
a “backend” fee. The parties have pointed out that there were
dozens of secondary lenders purchasing the loans. There is
no allegation that there were a discreet number of secondary
lenders that were used, which means that this conspiracy
could have transpired with any lender in the secondary
lending market. The district court found that these facts do
not show any type of mechanism by which this “group”
(CommonPoint and the entire secondary lending market)
conducted its affairs or made decisions.
Most cases interpreting the elements applicable to this
statute require evidence of some sort of “chain of command”
or other evidence of a hierarchy, even a highly limited one.
Evidence of any such hierarchical structure is absent from this
appeal. Although plaintiffs argue that CommonPoint’s
routine use of the “Approval Advice” form--which assured
ultimate approval of a loan by a secondary lender before
CommonPoint issued its own loan to the customer--was
evidence of the enterprise, the use of those forms seems to
indicate nothing more than that CommonPoint had a business
relationship with the secondary lenders. It does not allege or
show that they “function[ed] as a continuous unit.” Turkette,
452 U.S. at 583. Due to the fact that the enterprise alleged to
exist in this case is too unstable and fluid an entity to
constitute a RICO enterprise, we must AFFIRM the district
court’s holding on this issue. In light of this holding, it is
unnecessary for this court to further consider the plaintiffs’
appeal based on their contention that the district court erred
in determining that CommonPoint did not exert sufficient
No. 98-2266 VanDenBroeck, et al. v.
CommonPoint Mortgage Co., et al.
7
control over the alleged enterprise under the holding of Reves
v. Ernst & Young, 507 U.S. 170 (1993).
III. The Motion to Amend
Plaintiffs also challenge the district court’s denial of their
motion to amend the complaint. Denial of a motion to amend
is reviewed for abuse of discretion. See Vild v. Visconsi, 956
F.2d 560, 565 (6th Cir. 1992). When CommonPoint’s motion
to dismiss had been pending for about seven months,
plaintiffs moved the district court to allow them to amend
their complaint to add an additional Truth in Lending Act
claim, and also to allow them to cure any defects in pleading
which the district court found during its review of the pending
motion to dismiss. The court held that neither delay nor
prejudice would bar such amendment under the Foman v.
Davis standard and the precedent of this Circuit. See Foman
v. Davis, 371 U.S. 178 (1962). However, the court found
that futility, one of the articulated Foman v. Davis grounds for
restriction of the freely given right to amend the complaint,
would in this case be grounds to deny amendment. The
district court stressed that it was futility, and not undue delay
or prejudice, which was the basis for its denial of the motion
to amend.
Although the district court was not presented with an
alternative enterprise theory, we do not believe that
amendment of this complaint would have been futile, but
rather that plaintiffs could have amended this complaint to
allege a cognizable RICO enterprise. It is elementary that a
corporation alone can serve as an enterprise for purposes of
RICO, and pleading the RICO claim in this manner would
eliminate the burden of proving that the entire secondary
lending market was part of the enterprise at issue. See 18
U.S.C. § 1961(4) (1999) (defining an “enterprise” as “any
individual, partnership, corporation, association, or other legal
entity, and any union or group of individuals associated in fact
although not a legal entity.”) In response to this panel’s
inquiry concerning why the plaintiffs did not simply allege

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