Residential Capital, LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
RESIDENTIAL CAPITAL, LLC, et al.
Debtors.
NOT FOR PUBLICATION
Case No. 12-12020 (MG)
Jointly Administered
MEMORANDUM OPINION AND ORDER SUSTAINING RESCAP BORROWER
CLAIMS TRUST’S OBJECTION TO PROOFS OF CLAIM FILED BY GREGORY C.
MORSE
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Gregory C. Morse (“Morse”) filed four proofs of claim in these chapter 11 cases, each in
the amount of $6,475,662: (1) Claim No. 5656 against GMAC Mortgage, LLC (“GMACM”);
(2) Claim No. 5658 against Homecomings Financial, LLC (“Homecomings”); (3) Claim No.
5680 against GMACM; and (4) Claim No. 5682 against Homecomings. Claims No. 5656 and
5658 were expunged pursuant to the Debtors’ Sixth Omnibus Objection to Claims (Duplicate
Borrower Claims). The ResCap Borrower Claims Trust (the “Trust”) objects to Claims No.
5680 and 5682 (the “Morse Claims”) on the grounds that they fail to state a basis for liability
against the Debtors.1 The Morse Claims are based on a “[RICO] fraud complaint filed in E.
1 	The ResCap Borrower Claims Trust Objection to Proofs of Claim Filed by Gregory C. Morse Pursuant to
Section 502(b) of the Bankruptcy Code and Bankruptcy Rule 3007 (the “Objection,” ECF Doc. # 6743). The
Objection is supported by the Declaration of Lauren Graham Delehey (the “Delehey Decl.,” Obj. Ex. 3) and the
Declaration of Norman S. Rosenbaum (the “Rosenbaum Decl.,” Obj. Ex. 4). Also attached to the Objection are
various state court pleadings from the Texas Action (defined below), including the original complaint (the “Orig.
Compl.,” Obj. Ex. 6), the amended original complaint (the “Am. Orig. Compl.,” Obj. Ex. 7), the defendants’ motion
to dismiss and supporting memorandum of legal authority (the “Motion to Dismiss,” Obj. Ex. 8), Homecomings’
and GMACM’s notice of bankruptcy filing and supplemental servicing order (the “Notice of Bankruptcy,” Obj. Ex.
9), the report and recommendation of the United States Magistrate Judge (the “Magistrate Recommendation,” Obj.
Ex. 10), the civil docket sheet for Case # 4:12-CV-00375-RC-DDB (Obj. Ex. 11), the Order Adopting Report and
Recommendation of United States Magistrate Judge (the “Texas Court Order,” Obj. Ex. 12), and the Order Denying
Motion to Proceed In Forma Pauperis (Obj. Ex. 13).
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District of Texas Federal Court” concerning a mortgage loan refinancing agreement. (Claims
No. 5680, 5682.)
The Trust contends that the Morse Claims (1) fail to establish a claim for fraud under
Texas law; (2) fail to establish a claim for breach of contract; (3) fail to establish a claim for
violations of either the Texas Mortgage Broker License Act, Texas Finance Code § 156.001, et
seq., or the Texas Mortgage Banker Registration and Residential Mortgage Loan Originator
License Act, Texas Finance Code § 157.001 et seq.; and (4) fail to establish any other causes of
action against the Debtors.
Morse filed a response (the “Response,” ECF Doc. # 6825),2 and the Trust filed a reply
(the “Reply,” ECF Doc. # 6892). Morse also delivered to Chambers two boxes of documents
containing (1) a whistleblower package and (2) exhibits to his Response; but Morse did not serve
(and, indeed, refused to serve) copies of these voluminous documents on the Trust. On April 30,
2014, the Court entered an order explaining that the Court “will not consider the documents
Morse sent to the Court on April 22 and 23, 2014, that were not filed on ECF and not served on
the Trust.” (Order Regarding Ex Parte Documents sent to Court by Gregory C. Morse, dated
April 30, 2014 (ECF Doc. # 6842).)
A hearing on the Objection was scheduled for May 15, 2014. On May 7, 2014, Morse
filed a Request for an Adjournment of Hearing on Objection to Claim, requesting that the Court
adjourn the hearing on the Objection until July. (ECF Doc. # 6880.) The Court denied Morse’s
request, but agreed that Morse could appear by telephone; the Court further stated: “If [Morse]
chooses not to appear, the Court will take the matter under submission without argument by any
of the parties and the objection will be decided on the papers alone.” (ECF Doc. # 6931.) Morse
2 	Unless otherwise indicated, all references to the docket are to In re Residential Capital, LLC, et al., Case
No. 12-12020.
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did not appear at the May 15, 2014 hearing in person or by telephone, so the Court took the
matter under submission without any further argument from the Trust.
For the following reasons, the Court SUSTAINS the Trust’s Objection and EXPUNGES
the Morse Claims.
I. 	BACKGROUND
A. 	Facts
1. 	Procedural History
On May 14, 2012 (the “Petition Date”), Residential Capital, LLC (“ResCap”) and various
related entities (collectively, the “Debtors”) filed chapter 11 bankruptcy petitions. The bar date
for filing non-governmental proofs of claim was November 16, 2012. (See ECF Doc. # 2093.)
Morse timely filed all four of his claims on November 16, 2012.
On December 11, 2013, the Court entered an order (ECF Doc. # 6065) confirming the
Second Amended Joint Chapter 11 Plan Proposed by Residential Capital, LLC, et al. and the
Official Committee of Unsecured Creditors (the “Confirmed Plan,” ECF Doc. # 6065-1). The
Confirmed Plan became effective on December 17, 2013 (the “Effective Date”). (ECF Doc.
# 6137.) On the Effective Date, the Trust and the ResCap Liquidating Trust were established as
successors in interest to the Debtors—the Trust is the successor in interest with respect to
Borrower Claims. (Id.) The Trust was established to, among other things, “(i) direct the
processing, liquidation and payment of the Allowed Borrower Claims in accordance with the
Plan, and the distribution procedures established under the Borrower Claims Trust Agreement,
and (ii) preserve, hold, and manage the assets of the Borrower Claims Trust for use in satisfying
the Allowed Borrower Claims.” (Confirmed Plan, Art. IV.F.) The Trust is empowered to object
to borrower claims that it believes do not reflect liability of the Debtors.
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2. 	The Morse Loan
On March 3, 2008, Morse entered into a mortgage loan refinancing agreement (the
“Loan”) with Homecomings in the amount of $414,500.00, reflected by a note (the “Note”) and
secured by real property located in Plano, Texas (the “Property”).3 (Delehey Decl. ¶ 4.) The
Morse Loan was evidenced by a Deed of Trust executed by Morse on the same day in favor of
Homecomings, with MERS named as nominee for Homecomings. (Id.) GMACM was the
original servicer. (Id.) The Loan refinanced a first priority mortgage with EMC Mortgage Corp.
and a second priority mortgage with Homecomings. (Id.)
Homecomings endorsed the Note and Deed of Trust to GMACM. GMACM, in turn,
transferred the Note and Deed of Trust to the Federal National Mortgage Association (“Fannie
Mae”). (Id.) GMACM transferred servicing of the Loan to Green Tree Servicing, LLC in
February 2013. (Id.)
Morse last made a mortgage payment on the Loan in March 2011. (Id. ¶ 5.) He is
currently in default on the Note, but the Property has not yet been foreclosed; Morse retains
possession. (Id.)
3. 	The Texas Litigation
Morse has pursued two lawsuits in Texas related to the Loan. He filed his first lawsuit
(the “First Morse Action”)4 on April 26, 2011 in the United States District Court for the Eastern
District of Texas (“Texas District Court”). The First Morse Action asserted six causes of action:
(1) common-law fraud; (2) fraud under Tex. Bus. & Com. Code §§ 27.01(b) and (e); (3) breach
3 	Morse contends that the Property is located in the City of Murphy, Texas, and not in Plano, Texas.
(Response ¶¶ 30–31.) But the address listed on the Note is 223 High Point Dr., Plano, Texas 75094. (See Motion to
Dismiss, Ex. A.) Whether the Property is in Murphy or Plano has no bearing on the outcome of the Objection.
4 	Case No. 4:11-cv-00230.
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of contract; (4) violation of the Texas Mortgage Broker License Act; (5) violation of the Texas
Mortgage Banker Registration and Residential Mortgage Loan Originator License Act; and
(6) claims under the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending
Act (“TILA”). (See Memorandum Opinion and Order Granting Motions to Dismiss, Case No.
4:11-cv-00230 ECF Doc. # 31.) Debtors GMACM and Homecomings were among the
defendants in the First Morse Action. The Texas District Court dismissed the First Morse Action
because the RESPA and TILA claims were barred by the statute of limitations. (Id. at 5.) Since
those claims were dismissed, and diversity jurisdiction did not exist because several defendants
were Texas citizens, the court declined to exercise supplemental jurisdiction over the remaining
claims. (Id. at 4 n.1, 7.) The court dismissed the First Morse Action without prejudice. (Id. at
7.)
Morse’s second lawsuit (the “Texas Action”) forms the basis for the Morse Claims in
these chapter 11 cases. Morse initiated the Texas Action by filing a complaint (the “Original
Complaint”) in Texas state court in Collin County on May 18, 2012, 5 naming as defendants
Debtors GMACM and Homecomings, as well as non-debtors Commonwealth Land Title
Insurance Company, Homecomings Wholesale Funding,6 Ally Bank (“Ally”), Mortgage
Electronic Registration Systems, Inc. (“MERS”), MERSCORP, Inc., and Fannie Mae
(collectively, the “Defendants”). (Orig. Compl. at 1.) On June 20, 2012, the Defendants
removed the Texas Action to the Texas District Court on the basis of federal question
5 	Cause No. 199-01915-2012.
6 	Morse argues that the Defendants committed various acts of fraud relating to Homecomings Wholesale
Funding. Homecomings Wholesale Funding never made an appearance in the Texas Action and claims against that
entity were dismissed pursuant to Federal Rule of Civil Procedure 4(m). (See Magistrate Recommendation at 3 n.3;
Texas Court Order at 4–5.)
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jurisdiction with respect to the RICO claim and diversity and supplemental jurisdiction with
respect to the state law claims. (See Case No. 4:12-cv-00375 ECF Doc. # 1 ¶ 13.)
On June 22, 2012, Magistrate Judge Amos Mazzant ordered Morse to replead to comply
with the Federal Rules of Civil Procedure (the “FRCP”), including FRCP 8 and 9, and the
Eastern District of Texas local rules. (Id. ECF Doc. #10.) On August 20, 2012, Morse filed the
Amended Complaint. The Amended Complaint asserts the following causes of action:
(1) fraud; (2) breach of contract; (3) violation of the Texas Mortgage Broker License Act, Texas
Finance Code § 156.001, et seq.; (4) violations of the Texas Mortgage Banker Registration and
Residential Mortgage Loan Originator License Act, Texas Finance Code § 157.001, et seq.;
(5) violations of the Texas Deceptive Trade Practices Act (“DTPA”); and (6) violations of the
Racketeer Influenced and Corrupt Organizations Act (“RICO”). (Am. Compl. ¶¶ 163–76.)
Additionally, Morse seeks a declaratory judgment that (1) he does not currently have clear title to
the Property; (2) there was not a lender at closing; (3) the lender was not Homecomings; (4) no
entity had the right to transfer interests to Fannie Mae; (5) there is no lien on the Property as a
result of Morse’s refinance; and (6) he is entitled to treble civil damages under RICO. (Id.
¶ 162.) Morse also asks the court to determine what entities have an interest in his mortgage and
in his Property. Finally, Morse demands an “accounting” “for the funds that each and/or all
Defendants were associated with” because “[t]he numbers don’t make sense” and “appear to be
dishonest.” (Id. ¶ 175.)
On September 10, 2012, defendants Homecomings, GMACM, Ally, MERS,
MERSCORP., Inc., and Fannie Mae filed a Motion to Dismiss. They argued that the Amended
Complaint should be dismissed because the Amended Complaint failed to adequately plead the
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asserted causes of action. (Motion to Dismiss at 5–14.) Morse opposed the Motion to Dismiss.
(Case No. 4:12-cv-00375 ECF Doc. # 19.)
Also on September 10, 2012, Debtor defendants GMACM and Homecomings filed the
Notice of Bankruptcy. The Notice of Bankruptcy addressed this Court’s Final Supplemental
Order Under Bankruptcy Code Sections 105(a), 362, 363, 502, 1107(a), and 1108 and
Bankruptcy Rule 9019 (I) Authorizing the Debtors to Continue Implementing Loss Mitigation
Programs; (II) Approving Procedures for Compromise and Settlement of Certain Claims,
Litigations and Causes of Action; (III) Granting Limited Stay Relief to Permit Foreclosure and
Eviction Proceedings, Borrower Bankruptcy Cases, and Title Disputes to Proceed; and (IV)
Authorizing and Directing the Debtors to Pay Securitization Trustee Fees and Expenses (the
“Foreclosure Stay Relief Order,” ECF Doc. # 774). Pursuant to the Foreclosure Stay Relief
Order, Morse was free to pursue his declaratory judgment action to the extent that action was an
attack on the validity of any lien on his Property (the “Lien Claims”), but his claims for
damages—including his claims for fraud, breach of contract, and violations of RICO, the Texas
Mortgage Broker License Act, and the Texas Mortgage Baker Registration and Residential
Mortgage Loan Originator License Act (the “Non-Lien Claims”)—were stayed as a result of
these chapter 11 proceedings, to the extent Morse sought a recovery from any of the Debtors.
The Non-Lien Claims could, however, proceed against non-debtor defendants. (Notice of
Bankruptcy ¶¶ 7–8.) The Debtor defendants—GMACM and Homecomings—only moved to
dismiss the Lien Claims; all Non-Lien Claims against the Debtor defendants were stayed.
On November 11, 2012, United States District Judge Ron Clark referred the Texas
Action to Magistrate Judge Don D. Bush for pretrial purposes. (See Case No. 4:12-cv-00375
ECF Doc. # 24). On August 13, 2013, Judge Bush entered the Magistrate Recommendation,
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recommending dismissal with prejudice of (1) all claims against the non-debtor Defendants (with
the exception of Homecomings Wholesale Funding); and (2) the Lien Claims regarding Morse’s
lien against Debtor defendants GMACM and Homecomings, for failure to state a claim. The
remaining Non-Lien Claims against GMACM and Homecomings were and remain stayed. The
Magistrate Recommendation noted, however, that
upon the lifting of any stay, the analysis in this report finding that Plaintiff
has stated no statutory or common law fraud, breach of contract, RICO,
DTPA, Texas Mortgage Broker License Act, Texas Mortgage Banker
Registration and Residential Mortgage Loan Originator License Act,
accounting or “other” claims against Defendants Commonwealth Land
Title Insurance Company, MERS, MERSCORP, Inc., Ally and Fannie
Mae would be equally applicable to Homecomings and GMAC, and, upon
the lifting of the stay, a separate report and recommendations will be
entered recommending that they be applied accordingly.
(Magistrate Recommendation at 21.)
The Texas District Court adopted the Magistrate Recommendation on September 25,
2103, and dismissed Morse’s motions seeking discovery and sanctions against counsel, as well
as objections to the Magistrate Recommendation. (See Texas Court Order.) The Texas Court
Order dismissed the Texas Action (1) with prejudice as to all the non-Debtor defendants (except
Homecomings Wholesale Funding, which was dismissed without prejudice pursuant to FRCP
4(m)); (2) with prejudice as to the Lien Claims against GMACM and Homecomings, and
(3) continued the stay of proceedings against GMACM and Homecomings as to the Non-Lien
Claims. (Id.)
On October 23, 2013, Morse filed a Notice of Appeal of the Order Adopting the
Magistrate’s Recommendations and a Motion to Proceed In Forma Pauperis. On November 15,
2013, the Texas District Court denied the Motion to Proceed In Forma Pauperis without
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prejudice. (Obj. Ex. 13.) Morse’s appeal of the Texas Court Order remains pending in the Fifth
Circuit.7
4. 	The Morse Claims
Morse filed the Morse Claims on November 16, 2012. Each claim is for $6,475,662.00,
and each states the basis for the claim as: “[RICO] fraud complaint filed in E. District of Texas
Federal Court.” Presumably, the Morse Claims refer to the Amended Complaint. Each Claim
attaches (1) a “Summary of Unsecured Claim of Gregory C. Morse”; (2) an “Amortizing Loan
Calculator”; and (3) an “Affidavit of Secured Interest in the Property of Gregory C. Morse.” The
“Summary of Unsecured Claim of Gregory C. Morse” indicates that Morse seeks reimbursement
of the mortgage principal ($414,500.00), mortgage interest ($480,147.00), “[e]quity—(in
property)” ($848,400.00), maintenance and improvements ($415,507.00), and treble damages
($4,317,108.00), for a total of $6,475,662.00.
B. 	The Parties’ Arguments
The Trust argues that the Court should apply federal pleading standards when assessing
the validity of the Morse Claims. The Trust further asserts that FRCP 9(b)—imposing
heightened pleading standards on fraud claims–applies in contested matters such as claim
objections. See FED. R. BANKR. P. 9014(c), 7009. Consequently, the Trust argues that the
sufficiency of the pleading of the Morse Claims should be determined by applying FRCP 8(a)(2),
9(b), and 12(b)(6). The Court agrees.
In the Objection and the Reply, the Trust details each of the alleged deficiencies in
Morse’s Amended Complaint, which form the basis of his Claims. Morse’s Response contains
invective primarily targeted at the Debtors; he also attempts to reargue issues that were carefully
addressed and decided against him in the Texas Action. To the extent necessary, the Court
7 	Gregory Morse v. Homecomings Financial, L.L.C., et al., Case No. 13-41141 (5th Cir. 2013).
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addresses Morse’s arguments below, but a full recitation of the parties’ arguments is
unnecessary.8
II. 	DISCUSSION
A. 	Claims Objections
Claims objections have a shifting burden of proof. Correctly filed proofs of claim
“constitute prima facie evidence of the validity and amount of the claim . . . . To overcome this
prima facie evidence, an objecting party must come forth with evidence which, if believed,
would refute at least one of the allegations essential to the claim.” Sherman v. Novak (In re
Reilly), 245 B.R. 768, 773 (2d Cir. B.A.P. 2000). By producing “evidence equal in force to the
prima facie case,” an objector can negate a claim’s presumptive legal validity, thereby shifting
the burden back to the claimant to “prove by a preponderance of the evidence that under
applicable law the claim should be allowed.” In re Oneida Ltd., 400 B.R. 384, 389 (Bankr.
S.D.N.Y. 2009) (internal quotation marks omitted). If the objector does not “introduce[]
evidence as to the invalidity of the claim or the excessiveness of its amount, the claimant need
offer no further proof of the merits of the claim.” 4 COLLIER ON BANKRUPTCY ¶ 502.02 (16th
rev. ed. 2013).
Bankruptcy Code section 502(b)(1) provides that claims may be disallowed if
“unenforceable against the debtor and property of the debtor, under any agreement or applicable
law.” To determine whether a claim is allowable by law, bankruptcy courts look to “applicable
nonbankruptcy law.” In re W.R. Grace & Co., 346 B.R. 672, 674 (Bankr. D. Del. 2006).
Several courts, including those in this district, have applied the federal pleading standards
when assessing the validity of a proof of claim. See In re DJK Residential LLC, 416 B.R. 100,
8 	All of Morse’s arguments have been considered in connection with this decision, whether or not
specifically addressed below.
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106 (Bankr. S.D.N.Y. 2009) (“In determining whether a party has met their burden in connection
with a proof of claim, bankruptcy courts have looked to the pleading requirements set forth in the
Federal Rules of Civil Procedure.”) (citing In re Rockefeller Ctr. Props., 272 B.R. 524, 542
(Bankr. S.D.N.Y. 2000)). Thus, to the extent the Amended Complaint provides the basis for the
Morse Claims, it must satisfy the federal pleading requirements. For the reasons discussed
below, it does not.
Pursuant to FRCP 8(a)(2), a “pleading that states a claim for relief must contain . . . a
short and plain statement of the claim showing that the pleader is entitled to relief.” FED. R. CIV.
P. 8(a)(2). FRCP 8(a) “demands more than an unadorned, the-defendant-unlawfully-harmed-me
accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). While a claim “does
not need detailed factual allegations, . . . [it] requires more than labels and conclusions . . . .”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). “The Claimant must assert ‘enough facts
to state a claim to relief that is plausible on its face.’” DJK Residential, 416 B.R. at 106 (quoting
Twombly, 550 U.S. at 570). “To show facial plausibility, the Claimant must plead ‘factual
content that allows the court to draw the reasonable inference that the [Debtor] is liable for the
misconduct alleged.’” Id. (quoting Iqbal, 556 U.S. at 678).
FRCP 9(b) imposes heightened pleading standards for fraud-based claims. Pursuant to
FRCP 9(b), “a party must state with particularity the circumstances constituting fraud or
mistake” if making allegations of fraud. FED. R. CIV. P. 9(b). “In order to meet the
‘particularity’ requirement of FRCP 9(b), a plaintiff [must] allege the time, place, and content of
the alleged misrepresentations on which he or she relied; the fraudulent scheme; the fraudulent
intent of the defendants; and the injury resulting from the fraud.” Ind. State Dist. Council of
Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., 719 F.3d 498, 503 (6th
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Cir. 2013) (alteration in original) (internal quotation marks omitted). “The purpose of Rule 9(b)
is to provide fair notice to the defendant so as to allow him to prepare an informed pleading
responsive to the specific allegations of fraud.” Advocacy Org. for Patients & Providers v. Auto
Club Ins. Ass’n, 176 F.3d 315, 322 (6th Cir. 1999).
Assuming that Morse’s proofs of claim constitute prima facie evidence of the validity
and amount of his Claims, the Trust’s Objection brought forward sufficient evidence to refute
essential elements of the Morse Claims, thereby shifting the burden back to Morse. The vague,
conclusory allegations contained in the Amended Complaint do not support a reasonable
inference that Homecomings and GMACM are liable for the alleged misconduct. Morse’s
Response, rather than asserting any meaningful bases for the Claims, is littered with
(1) conclusory allegations of fraudulent activity insufficient to establish a basis for fraud under
relevant statutes or pleading standards and (2) unsupported allegations of misconduct on the part
of the Debtors’ counsel in these cases. The procedural “deficiencies” Morse identifies in the
Trust’s Objection are meritless—the Trust may object to both of his Claims through a single
objection and was not required to seek additional documentation from him since the basis for the
Objection was not insufficient documentation.9 (See ECF Doc. # 3294 (sending a request letter
is mandatory when the Debtors/Trust seek to disallow a claim on an insufficient documentation
basis, but discretionary otherwise).) Finally, his allegations of misconduct regarding
Homecomings Wholesale Funding are not here because Homecomings Wholesale Funding (if it
9 	The Trust claims that it sent Morse a request letter to request additional supporting documentation and
explanation in support of the Morse Claims on June 11, 2013. (See Rosenbaum Decl. ¶ 3; Obj. Ex. 5.) Morse
claims that he never received a request letter. (See Response ¶ 26(K).) But even assuming that Morse did not
receive a request letter, this is not a basis upon which to deny the Objection; as explained above, the Trust was not
required to send any such letter prior to filing its Objection.
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exists) is not a Debtor. Additionally, as further explained below, the Morse Claims fail to state a
basis of liability against either GMACM or Homecomings.
B. 	Quiet Title Claims
Unlike Morse’s Non-Lien Claims, which were stayed pursuant to the Foreclosure Stay
Relief Order, Morse’s claims for declaratory relief to quiet title were adjudicated by the Texas
District Court. See Texas Court Order at 7 (“As to the claims against defendants Homecomings
and GMAC, the declaratory judgment action . . . is DISMISSED with prejudice. All remaining
claims against Homecomings and GMAC are and shall remain STAYED pending the resolution
of the bankruptcy proceedings.”). The Court cannot and will not review the decision of the
Texas District Court as to the quiet title claims. Morse represents that he is pursuing an appeal to
the Fifth Circuit—that is the appropriate court to review the Texas District Court’s
determinations.10
C. 	Fraud Claims
To assert a claim of fraud under Texas law, a plaintiff must allege: (1) a material
representation was made; (2) the representation was false; (3) when the representation was made,
the speaker knew it was false or made it recklessly without any knowledge of the truth and as a
positive assertion; (4) the speaker made the representation with the intent that the other party
should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby
suffered injury. Flaherty & Crumrine Preferred Income Fund, Inc., 565 F.3d 200, 212 (5th Cir.
2009) (citing Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001)).
FRCP 9(b) requires that a fraud claim in federal court be pled with particularity.
10 	“A case pending appeal is res judicata and entitled to full faith and credit unless and until reversed on
appeal.” Fid. Standard Life Ins. Co. v. First Nat’l Bank & Trust Co., 510 F.2d 272, 273 (5th Cir. 1975); see also In
re Marriage of Brown, 870 S.W.2d 600, 604 (Tex. App. 1993) (a judgment is final for the purposes of res judicata
despite the pendency of an appeal).
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Morse alleges that the “Defendants made false, material misrepresentations to Plaintiff to
secure his business and to induce him into the refinancing.” (Am. Compl. ¶ 164.) Morse groups
together all of the Defendants and does not identify with specificity the “who, what, when,
where, and how” of representations made to him with intent to defraud him, as is required under
FRCP 9(b). Additionally, Morse does not identify (1) how he relied on a fraudulent
misrepresentation or (2) how he was injured by a fraudulent misrepresentation. Consequently,
he has not sufficiently pled a claim for fraud under Texas law.
1. 	Fraud Claim Under Texas Bus. & Com. Code § 27.01
Morse alleges in the Amended Complaint that the “Defendants violated [the] protections”
of section 27.01 of the Texas Business and Commerce Code. (Am. Compl. ¶¶ 166–67.) Texas
Business and Commerce Code section 27.01, “Fraud in Real Estate and Stock Transactions,”
states:
Fraud in a transaction involving real estate or stock in a corporation or
joint stock company consists of a
(1) false representation of a past or existing material fact, when the
false representation is
(A) made to a person for the purpose of inducing that
person to enter into a contract; and
(B) relied upon by that person in entering into that contract.
TEX. BUS . & COM. CODE § 27.01. “That statute, by its own terms, applies only to fraud in real
estate or stock transactions.” Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 343 (5th Cir.
2008) (citing Burleson State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex. App. 2000)). It
“applies to misrepresentations of material fact made to induce another to enter into a contract for
the sale of land or stock,” but “[a] loan transaction, even if secured by land, is not considered to
come under the statute.” Burleson State Bank, 27 S.W.3d at 611; see also Greenway Bank &
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Trust of Houston v. Smith, 679 S.W.2d 592, 596 (Tex. App. 1984) (“The statute makes no
mention of any application to guaranty agreements, secured by real estate, or to a party who
‘merely’ loaned money for the purchase of real estate.”).
Since Morse alleges only a loan refinancing, even though the refinancing was secured by
land, his claims fail. The claims additionally lack the specificity required by FRCP 9(b).
2. 	Fraud Claim Under RICO
To establish a claim under RICO, a plaintiff must allege harm from (1) a person who
engages in (2) a pattern of racketeering activity11 (3) connected to the acquisition, establishment,
conduct, or control of an enterprise. 18 U.S.C. § 1962. The Second Circuit has explained:
To state a claim for damages under RICO a plaintiff has two pleading burdens.
First, he must allege that the defendant has violated the substantive RICO statute,
commonly known as “criminal RICO.” In so doing, he must allege the existence
of seven constituent elements: (1) that the defendant (2) through the commission
of two or more acts (3) constituting a “pattern” (4) of “racketeering activity”
(5) directly or indirectly invests in, or maintains an interest in, or participates in
(6) 	an 	“enterprise” 	(7) 	the 	activities 	of 	which 	affect 	interstate 	or 	foreign
commerce. Plaintiff must allege adequately defendant’s violation of section 1962
before turning to the second burden—i.e., invoking RICO’s civil remedies of
treble damages, attorneys[’] fees and costs. To satisfy this latter burden, plaintiff
must allege that he was “injured in his business or property by reason of a
violation of section 1962.”
Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir. 1983) (emphasis in original) (citations
omitted); see also Zavalidroga v. Cote, 395 Fed. App’x 737, 740–41 (2d Cir. 2010) (applying
Moss); In re Residential Capital, LLC, 507 B.R. 477, 494–95 (Bankr. S.D.N.Y. 2014).
The enterprise must be “an entity separate and apart from the pattern of activity in which
it engages.” United States v. Turkette, 452 U.S. 576, 583 (1981); see also Whelan v. Winchester
Prod. Co., 319 F.3d 225, 229 (5th Cir. 2003) (concluding that “an enterprise is a group of
persons or entities associating together for the common purpose of engaging in a course of
11 	Racketeering activity is defined under 18 U.S.C. § 1961 to include dozens of predicate offenses, including
extortion, bribery, counterfeiting, and mail fraud.
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conduct”; and explaining that “an enterprise may be a legal entity or any union or group of
individuals associated in fact”); Allstate Ins. Co. v. Rozenberg, 590 F. Supp. 2d 384, 390
(E.D.N.Y. 2008) (stating that the enterprise must be “distinct from those persons or entities who
stand accused of conducting that racketeering activity”).
Failure to file a RICO case statement may warrant dismissal of RICO claims. See Barrus
v. Dick’s Sporting Goods, Inc., 732 F. Supp. 2d 243, 259 (W.D.N.Y. 2010); Walker v. Stanton,
No. EDCV 08–24, 2008 WL 4401388, at *5–6 (C.D. Cal. Sept. 2, 2008); Pierce v. Ritter,
Chusid, Bivonia & Cohen, 133 F. Supp. 2d 1344, 1346 (S.D. Fla. 2001); see also Lui Ciro, Inc.
v. Ciro, Inc., 895 F. Supp. 1365, 1377–78 (D. Haw. 1995) (analyzing dismissal of RICO claim
for failure to file RICO case statement under Rule 41(b)).
Even if a plaintiff can demonstrate a substantive RICO violation, the plaintiff must also
show “injury to the plaintiff’s business or property” and “that such injury was by reason of the
substantive RICO violation.” Catholic Health Care W. v. US Foodserv. (In re US FoodServ.
Pricing Litig.), 729 F.3d 108, 117 (2d Cir. 2013).
Even in a civil RICO case, a plaintiff must allege criminal activity. To plead a “pattern of
racketeering activity,” the plaintiff must identify two or more predicate criminal acts that are
both (1) related and (2) amount to or pose a threat of continued criminal activity. St. Germain v.
Howard, 556 F.3d 261, 263 (5th Cir. 2009) (per curiam) (analyzing civil RICO pleading
standards). “To establish an ‘association in fact’ enterprise under 18 U.S.C. § 1961(4) plaintiffs
must show ‘evidence of an ongoing organization, formal or informal, and . . . evidence that the
various associates function as a continuing unit.’” Atkinson v. Andarko Bank & Trust Co., 808
F.2d 438, 441 (5th Cir. 1987) (quoting Turkette, 452 U.S. at 583).
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Morse fails to identify specific facts in the Amended Complaint that would show an
enterprise of individuals associated in fact with GMACM and Homecomings. Additionally, his
allegations do not connect any injury to substantive RICO violations, and Morse does not
identify two or more predicate criminal acts that pose a threat of continued criminal activity.
Consequently, Morse fails to state a claim for RICO liability.
3. 	Fraud Claim Under Texas Deceptive Trade Practices Act
Morse alleges that the Debtor defendants violated “18 U.S.C. §§ 1341 and 1343, 18
U.S.C. § 1961, 18 U.S.C. § 1963 and Texas Business and Commerce Code § 17.45 and 27.01.”
(Am. Compl. ¶ 166.) As a preliminary matter, these bare allegations are conclusory and do not
plead fraud with the requisite factual particularity required by FRCP 9(b). Moreover, Morse
cannot state a claim under the DTPA because he cannot show that he is a consumer within the
meaning of the statute. To qualify as a consumer under the DTPA, a plaintiff must establish that
he is “an individual . . . who seeks or acquires by purchase or lease, any goods or services . . . .”
TEX. BUS & COM. CODE § 17.45(4). In general, loans of money or extensions of credit are not
considered goods or services that can form the basis of a DTPA claim. Gomez v. Wells Fargo
Bank, N.A., 2010 WL 2900351, *3 (N.D. Tex. 2010) (concluding that mortgagor who attempted
to modify her home loan with mortgagee to avoid repossession of her home was not a consumer
under the DTPA because she was attempting to borrow money and not purchase a good or
service); see also Riverside Nat’l Bank v. Lewis, 603 S.W.2d 169, 175–76 (Tex. 1980) (stating
that a party who “seeks only money in a transaction is not a consumer” under the DTPA);
Maginn v. Norwest, 919 S.W.2d 164, 167 (Tex. App. 1996) (holding that a party was not a
consumer where purpose of transaction was only to obtain a mortgage loan). It is true that a
party who obtains a loan that is “inextricably intertwined” in the purchase or lease of a good or
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service may qualify as a consumer. See Knight v. Int’l Harvester Credit Corp., 627 S.W.2d 382,
389 (Tex. 1982) (concluding that a bank customer qualified as a consumer because he sought
financing to purchase a dump truck). But “[t]he determining factor is whether the purchase or
lease of a good or service was ‘an objective of the transaction, not merely incidental to it.’”
Gomez, 2010 WL 2900351, at * 3 (quoting Fed. Deposit Ins. Corp. v. Munn, 804 F.2d 860, 865
(5th Cir. 1986)).
Morse used his loan to refinance his home. This does not qualify as a “good” or
“service” under the DTPA. See, e.g., Fix v. Flagstar Bank, FSB, 242 S.W.3d 147, 160 (Tex.
App. 2007) (concluding that the refinance of home equity loan cannot qualify as a good or a
service under the DTPA); Marketic v. U.S. Bank Nat. Ass’n, 436 F. Supp. 2d 842, 85 (N.D. Tex.
2006) (concluding that a home equity loan is not a “good” or a “service” under the DTPA).
Since Morse was not a consumer under the DTPA, he cannot recover on a DTPA fraud claim
against the Defendant Debtors.
D. 	Breach of Contract Claim
There are four elements of a breach of contract claim under Texas law: (1) the existence
of a valid contract; (2) performance or tendered performance by the plaintiff; (3) the defendant’s
breach of the contract; and (4) resulting damages to the plaintiff. See Mullins v. TestAmerica,
Inc., 564 F.3d 386, 418 (5th Cir. 2009) (quoting Aguiar v. Segal, 167 S.W.3d 443, 450 (Tex.
App. 2005)); Smith Intern., Inc. v. Egle Grp., LLC, 490 F.3d 380, 387 (5th Cir. 2007) (citing
Valero Mktg. & Supply Co. v. Kalama Int’l, L.L.C., 51 S.W.3d 345, 351 (Tex. App. 2001)); Rice
v. Metro. Life Ins. Co., 324 S.W.3d 660, 666 (Tex. App. 2010). To plead a breach of contract
claim, a plaintiff must point to a specific provision in the contract that the defendant breached.
Coleman v. Bank of Am., N.A., 2011 WL 2516169, at *1 (N.D. Tex. 2011) (citation omitted)
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(dismissing breach of contract claim for failure to state a claim where “plaintiff points to no
specific provision in the Deed of Trust that was breached by defendant”).
Morse alleges that there “is a valid, enforceable contract,” that he “performed, tendered
performance of or was excused from performing his contractual obligations,” that “Defendants
breached the contract,” and that he was injured by the Defendants’ breach. (Am. Compl. ¶ 169.)
But Morse does not actually identify anywhere in the Amended Complaint (1) the contract at
issue; (2) the provision that the Debtor defendants breached; (3) how the Debtor defendants
breached the contract; or (4) how he was injured. Nor does he identify which of the
defendants—and whether the Debtor defendants were included—breached the contract.
Consequently, he has not adequately alleged that either GMACM or Homecomings breached a
contract to which they were parties.
E. 	Texas Mortgage Broker License Act
Morse alleges that one or more of the Defendants failed to register as required by the
Texas Mortgage Broker License Act and is therefore liable under Tex. Fin. Code section
156.406. That section provides:
(b) A person who received money, or the equivalent of money, as a fee or
profit because of or in consequence of the person acting as a residential
mortgage loan originator without an active license or being exempt under
this chapter is liable for damages in an amount that is not less than the
amount of the fee or profit received and not to exceed three times the
amount of the fee or profit received, as may be determined by the court.
An aggrieved person may recover damages under this subsection in a
court.
TEX. FIN. CODE § 156.406(b). To be an “aggrieved person” under the statute, “the claimant must
have paid all or part of the fee or profit to the unlicensed mortgage broker or loan officer.”
Dohalick v. Moody Nat’l Bank, 375 S.W.3d 537, 541 (Tex. App. 2012).
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As a preliminary matter, Morse does not identify which Defendants acted without an
active license, so Morse fails to satisfy Rule 8(a)(2). Moreover, he has not adequately pled that
he is an “aggrieved person” eligible for relief under this statute. Consequently, he fails to state a
claim for violation of the Texas Mortgage Broker License Act.
F. 	Texas Mortgage Banker Registration and Residential Mortgage Loan
Originator License Act
Morse alleges that one or more of the Defendants is not registered in violation of section
157.003 of the Texas Finance Code. Again, he does not identify which of the Defendants is not
registered. Additionally, he failed to specify the actual damages he suffered as a result of the
alleged violation, as required by the Act. See TEX. FIN. CODE § 157.027. Consequently, he fails
to state a claim under the Texas Mortgage Banker Registration and Residential Mortgage Loan
Originator License Act.
G. 	“Other Causes of Action”
To the extent that Morse claims that “other causes of action” will come to light after
discovery, these allegations are not sufficient to establish liability for GMACM or
Homecomings. A complaint cannot “le[ave] open the possibility that a plaintiff might later
establish some ‘set of undisclosed facts’ to support recovery.” Twombly, 550 U.S. at 561. These
undisclosed causes of action are not sufficient to support a claim in these chapter 11 cases.
To the extent that Morse alleges “accounting” as an individual basis for relief, he is
mistaken. Accounting is generally considered to be an equitable remedy. See Animale Grp. Inc.
v. Sunny’s Perfume Inc., 256 F. Appx. 707, 709 (5th Cir. 2007). As Morse has failed to establish
a basis of independent liability, he is not entitled to this equitable remedy.
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III. 	CONCLUSION
For all of the foregoing reasons, the Objection is SUSTAINED, and claim numbers 5680
and 5682 are hereby disallowed and expunged.
IT IS SO ORDERED.
Dated: June 6, 2013
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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