Action Against Mortgage Broker Proceeds

(This story, in slightly different form, originally appeared in the New York Law Journal.)

NEW YORK CITY-A federal judge has declined to dismiss a lawsuit brought by a Long Island couple against a mortgage broker they claim was working in tandem with the orchestrator of a Ponzi scheme who is serving prison time for stealing more than $11 million from investors. In Iannuzzi v. Washington Mutual, 07-cv-00964, Eastern District Judge Joseph F. Bianco has ruled that Anthony and Theresa Iannuzzi had sufficiently alleged that a fiduciary relationship existed between them and the mortgage broker, Custom Capital Corp.

The decision will be published Wednesday.

“Of course, it is entirely unclear at this juncture whether discovery will reveal facts sufficient to support the existence of such a relationship,” Judge Bianco wrote.

The case is part of a lengthy and complex civil litigation that arose after the criminal investigation of Peter Dawson, a financial adviser who fleeced dozens of investors of retirement and other savings.

Dawson was sentenced to between five and 15 years behind bars in June by Nassau Supreme Court Justice Jeffrey S. Brown. While in jail awaiting sentencing, Dawson gave voluminous deposition testimony regarding the financial machinations between him and the various institutions he alleged were complicit in the thefts.

A 53-plaintiff class action is being litigated in the case before Nassau Supreme Court Justice F. Dana Winslow. The Iannuzzis are not part of that case because their suit was removed to the Eastern District last year by one of the defendants.

The couple, represented by Kevin R. Toole of Westbury, allege fraud, breach of fiduciary duty and violation of the Truth in Lending Act against Dawson, Custom Capital and several lenders, including Washington Mutual and American Mortgage Network.

According to the decision, Dawson had served as the couple’s financial adviser for 15 years. In early 2006, they discussed with him the possibility of obtaining a reverse mortgage on the their home.

Under a reverse mortgage, seniors can receive money for the equity in their homes, but the obligation to repay the loan is deferred until the homeowner dies.

After deciding to apply for the reverse mortgage, the Iannuzzis claim they were introduced by Dawson to Michael Laucella, who worked for Custom Capital. Dawson allegedly told the Iannuzzis he had a “working relationship” with Laucella.

The couple alleged they were never told Laucella was a convicted felon who had served time for “securities and other financial crimes prior to his becoming employed” by Custom Capital.

“During the communications with [Custom Capital], plaintiffs were asked a limited number of superficial questions that did not encompass the scope of the information or documentation that would be required to fully complete an application for a mortgage of any kind,” the couple alleged in their complaint.

They also contend they believed Custom Capital was acting as their broker to secure “the best possible reverse mortgage product” for them.

Dawson subsequently allegedly advised the Iannuzzis that they had been approved for a reverse mortgage by American Mortgage Network, referred to as AmNet in the decision.

At a purported May 2006 closing, the Iannuzzis, who were not represented by counsel, executed “various documents” they believed were to secure a $300,000 reverse mortgage, according to the decision.

Dawson gave the couple a check for $3,600, telling them it was the first monthly installment they would be receiving under the reverse mortgage, according to the complaint. The checks continued until October 2006.

In November 2006, Washington Mutual advised the Iannuzzis they were late on their mortgage payments and owed $5,258.

Ruling that Custom Capital Corp. was not a creditor, Judge Bianco dismissed the claim against it based on an alleged violation of the Truth in Lending Act.

“This Court joins the overwhelming number of other courts that have held that a mortgage broker does not qualify as a creditor under TILA,” the judge wrote, citing to the statutory language of 15 U.S.C. §1601 (f).

That section defines a creditor as someone who “regularly extends consumer credit if, in any 12-month period, the person originates more than one credit extension…or one or more such credit extensions through a mortgage broker.”

In the Iannuzzis’ case, the judge said, “plaintiffs do not allege that CCC was a party to the loan or acted as a ‘creditor’ under TILA; rather, the allegation is that CCC acted as a mortgage broker. Because CCC did not function as a creditor or lender in the transaction, it cannot be held liable under TILA.”

However, the judge did find that a fiduciary duty claim could proceed against Custom Capital.

Noting that New York courts traditionally have held that there is no such relationship between mortgage brokers and borrowers, Judge Bianco nevertheless ruled one existed in this case.

“[A]s CCC recognized in its papers and at oral argument, a broker may take on a fiduciary duty by performing tasks and/or taking on obligations beyond that of an independent broker or traditional middleman,” he wrote.

Judge Bianco ruled that the couple’s claim that they were advised of a close relationship between Dawson and Laucella, who they believed went beyond the scope of duty to secure a favorable lender, sufficiently alleged breach of fiduciary duty.

“The Court concludes that the Amended Complaint sufficiently alleges that CCC engaged in conduct, as well as made representations to plaintiffs, that created a fiduciary relationship with plaintiffs,” the judge wrote.

He also declined to dismiss a cross-claim against Custom Capital brought by AmNet on contractual indemnity and common law contribution grounds.

L’Abbate, Balkan, Colavita & Contini of Garden City represented Custom Capital.

In court papers, Scott Kossove of L’Abbate Balkan called the Iannuzzis’ fiduciary duty claim “meritless,” writing that they acknowledged they “did not have any meaningful communications with CCC that could even possibly give rise to a heightened duty on the part of CCC to plaintiffs.”

Kossove pointed to the couple’s reliance on Dawson to set up the loan. Their claim that “facts may come to light during the course of discovery” demonstrating a fiduciary relationship was “nothing but idle speculation,” he said.

The judge also denied a cross-claim against Custom Capital brought by AmNet on contractual indemnity and common law contribution grounds.

John P. Foudy of Rosner, Nocera & Ragone in Manhattan represents three of the lenders, including AmNet and Washington Mutual.

AmNet had no direct contact with the Iannuzzis, he said.

“There was no reverse mortgage–the plaintiffs’ claim that they intended to enter into a reverse mortgage but the application submitted by Custom Capital on behalf of plaintiffs was for a standard mortgage,” he said.

Foudy characterized the decision as “thorough,” but stressed that Judge Bianco noted “he is accepting the allegations at face value, and that’s what they are–allegations.”

Jacob H. Zamansky of Zamansky & Associates in Manhattan, said the ruling may have an impact on his plaintiff class now before Justice Winslow in Nassau Supreme.

“There are similar issues there,” he said in an interview, adding that Custom Capital is the mortgage broker for seven or eight of the plaintiffs he represents.

Vesselin Mitev can be reached at [email protected].