RICO Expert Talks About UWM Class Action Lawsuit

A lawyer who specializes in racketeering cases says independent mortgage brokers working with United Wholesale Mortgage may have misled clients, but that doesn’t mean the company and its CEO Mat Ishbia will be found liable for violating the RICO Act.

In a class action lawsuit filed on April 2 by Boies Schiller Flexner LLP, it is alleged that UWM participated in a pattern of racketeering activity by conspiring with brokers to withhold information from homebuyers while misrepresenting material facts to get these consumers to use the mortgage giant while financing their properties.

Jeffrey Grell, who wrote “Grell on RICO: A Practical Guide to the Racketeering Influenced and Corrupt Organizations Act,” has taught courses on the subject at the University of Minnesota Law School. He works as special counsel at Ted B. Lyon & Associates in Dallas, Texas.

Grell recently sat down with Editor Kimberley Haas to discuss the lawsuit and what might happen next.

Haas: So tell me, first of all, Jeff, what’s your impression of this class action claim against United Wholesale Mortgage?

Grell: It’s very similar to many other types of RICO claims that are brought in the consumer space. This is a mortgage case, so you’re not dealing with consumers in a classical sense, but people, the general public, advertising, deceptive and false advertising claims, basically an alleged scheme that targets normal people.

It’s all based on common representations made in print or electronic media. It’s typical of the type of RICO claim that would be brought in a class action context.

Haas: Okay. What’s the definition of racketeering?

Grell: You have to prove a defendant person that’s distinct from an enterprise, and the defendant person needs to operate and manage the enterprise through a pattern of racketeering activity.

For civil standing, you also need to prove injury by reason of the acts of racketeering, which basically means you, as the plaintiff, need to be injured by the conduct.

The main difference between any civil and criminal lawsuit is that a prosecutor doesn’t need to prove any injury. They just need to prove that the person engaged in the criminal conduct, regardless of whether there was a victim that suffered any injury or not, that’s why you have attempted crimes and aiding and abetting, crimes like that. Civilly you only have standing if you actually were injured.

And under RICO, that’s even further limited. It has to be injuries to business or property, which essentially means a plaintiff can only recover for economic losses. Plaintiffs cannot recover for things like broken bones, pain and suffering, emotional distress, anything having to do with the body or psychological health.

Haas: So economic compensation is the remedy in a civil racketeering claim?

Grell: The only thing you can get in a civil lawsuit is money and injunctive relief of some sort, like a restraining order or something like that. Nobody goes to jail in a civil lawsuit.

Haas: All right. When it comes to this claim, this class action claim against United Wholesale Mortgage, when you look over the complaint, what are the merits of this claim?

Grell: The basis of the lawsuit is basically that United Wholesale Mortgage operates through a network of agents and dealers, people who interact with the general public.

The claim is that these brokers are not so independent, even though they advertise themselves as being independent and they promise consumers that they’ll go out and shop and get them the best deals.

This lawsuit alleges that United Wholesale Mortgage has essentially got these brokers captive through various financial incentives and other benefits that the brokers get from sending business to UWM and that a large percentage of the people that go through these brokers end up with UWM and it’s not really independent at all. They’re essentially just agents for one mortgage company.

Haas: What are some of the holes in this case when it comes to what these people are alleging? Are there any red flags when you look over the complaint, things that maybe a judge might entertain a motion to dismiss over?

Grell: In any complaint, you have a statement of the parties, and then there’s a jurisdictional statement, and then there’s a long section of the complaint that’s basically just the story of what happened and how people were injured. Then you get to the legally important part of it, which sets down what we as lawyers call causes of action. Essentially those are the statutes or common law remedies that you have to plead in the complaint so that when you go to trial the jury will be instructed on the elements that need to be proven.

In these claims for relief, the first count is seeking relief under Section 1962 C of RICO, which is the most common RICO provision. The main issue that I see is that they bring a claim against Mat Ishbia. He’s an executive at UWM. And they don’t really allege how this particular individual operates and manages the enterprise. They do so for the corporate entity UWM, but not for this officer.

So, I would argue, if I represented the defendants, he should be dismissed.

Then as far as UWM goes, they have a kind of an awkward enterprise that’s plead, because one thing under RICO is that the defendant needs to be distinct from the enterprise. Here, UWM is alleged to be a person, so there’s got to be some other enterprise that UWM is alleged to be operating.

They basically allege, well, UWM is operating an association of fact enterprise, which is a group, it’s a fancy way of saying a group.

That network of mortgage brokers and brokerage firms that we were talking about initially, that works if they are sufficiently independent, and they probably are. For me, again, as a lawyer, I just think that’s awkward.

I think that one problem that’s more substantive, that they will probably have difficulty with, is they plead a violation of Section 1346 as a RICO Act. And that is essentially a scheme. It is about honest services and it’s about bribing and paying kickbacks and that sort of thing. And 1346 is not an act of racketeering that’s listed under RICO.

Your acts of racketeering all have to be included in the statute. Mail and wire fraud are also a basis for this claim. They’re legit, but not 1346.

The main thing I think that they’re going to face going as something they can’t plead around, something that can’t be correct in the pleadings, is that their complaint sounds a lot like a breach of fiduciary duties.

Those are duties that are owed when you’re in a confidential relationship, like an executor to the beneficiaries of an estate, an attorney to a client, a doctor to a patient. All of these kind of relationships of trust give rise to fiduciary duties. And if a professional, like a lawyer, breaches your duties to your clients, that’s called a breach of fiduciary duty.

A lot of the claims that are plead in this lawsuit sound of that type of liability. And RICO liability has to be predicated on acts of racketeering and breaching those kinds of duties is not racketeering.

The argument that they’re going to face is that the direct cause – if the plaintiffs were injured here – the direct cause of that injury was a breach of fiduciary duty, not fraud, not mail and wire fraud, not kickbacks or bribery. The direct cause is that these brokers owed fiduciary duties to their clients, the homeowners, the homebuyers, and the brokers did not fully disclose their conflicts of interest, the relationship with UWM.

That’s not uncommon. There’s almost always a proximate cause argument.

Haas: So if Mat Ishbia, as the CEO of UWM, can be set aside from this claim, and the defense can show that there isn’t a RICO claim, and like you said, they can bring up this proximate cause defense, what’s the burden of proof for both the plaintiffs and the defendants going forward?

Grell: The plaintiff’s lawyers, they want to get past a motion to dismiss. On a motion to dismiss the burden of proof that the defendant has to show is that looking at the four corners of the complaint, which have been completely written by the plaintiff – lawyers say you’re the master of your own complaint meaning that whatever you put in that complaint, you get to use as ammunition when a motion to dismiss is filed and the defendants aren’t supposed to be able to go beyond those four corners – what the defendant is arguing is even if you take the plaintiff’s best, literal best case scenario, which they put forth in their complaint, they’re still not entitled to relief.

It’s a very pro-plaintiff burden of proof because the point of a motion to dismiss is to get rid of claims that have no merit and shouldn’t proceed to discovery and force the cost of discovery on the defendant.

Then the next step would be to proceed to discovery. And in this instance, I’m assuming the plaintiffs would be entitled to a lot of information from the defendant. The defendant would be gathering information from the class representatives.

Then they would go to summary judgment. That’s looking at the facts, not looking at the allegations, but looking at all the facts that have been developed through discovery. And the court asks, “Given the best set of facts that plaintiffs can come up with, and viewing those facts in the light most favorable to the plaintiff, is there a basis upon which a jury could rule in the plaintiff’s favor?”

The defense will say, “No, there is no basis.” The plaintiff will say, “Yes, there’s a disputed fact here. It’s got to be resolved by jury.”

Then a court will decide that. If it passes that hurdle, then you go to trial.

At trial the burden of proof that the plaintiff has to bear is a preponderance of the evidence. The plaintiff at trial will need to prove all elements of the RICO claim by just enough so that the scale tips slightly in the plaintiff’s favor. It’s not beyond a reasonable doubt like it is in the criminal context. It’s just preponderance of the evidence. So slightly more than 50%.

Haas: How long do these cases typically take? This was just filed at the beginning of April. How long does it take for something like this to go through the justice system?

Grell: Years, especially a RICO class action like this. It’s questioning a very large commercial entity, UWM, and the way in which it does business on a very fundamental level.

There’s just going to be a ton of discovery, a ton of depositions. A judge will of course try to get the parties to focus on what’s absolutely needed to try the case. Judges typically aren’t going to let the plaintiffs depose everybody that works in the company. The plaintiffs are going to have to focus on the really material employees and agents.

Likewise, a defendant is not going to be able to depose every customer. But even with those limiting a case like this, you’re talking about a large number of documents.

Document discovery needs to be managed and processed and digested and organized so that you know what exhibits you want to use. And then after you get all the documents organized, you go into depositions and use the documents and everything you’ve gained and written discovery to gather pretrial testimony basically.

All of that, like I said, leads up to a motion for summary judgment.

Haas: How often are these cases settled?

Grell: Often, if they’re not dismissed. I should make that distinction.

A lot of RICO claims are dismissed because there are a lot of bad RICO claims that are filed, and they get dismissed. Once you survive a motion to dismiss though as a plaintiff, you have a very big weapon in your hand, because like I said, a RICO claim is based on a pattern of racketeering activity. And patterns by nature occur over a long period of time.

A claim that’s based on something like mail and wire fraud, basically almost any document in your business relationship, like in this case, in the business relationship between UWM and their brokers, is going to be relevant. That’s a large number of documents. It’s very expensive to engage in discovery.

And it’s not just expensive in terms of lawyers and all of the costs for court reporters and depositions and document management services and that sort of thing. But there’s the lost value of time that the employees have to go through and rather than doing their job, they’re focused on this litigation.

For a big company, that can be a big cost factor as well, just having all these people distracted and working two or three hours a day on litigation rather than making money for the company. So there’s a strong incentive for the defendant to settle and avoid discovery.

Likewise, there’s a strong incentive for the plaintiffs to settle, because in most cases like this that are class actions, the plaintiff’s lawyers working on a contingency fee basis. The lawyer doesn’t get paid until the litigation is resolved.

And the lawyer, of course, wants the litigation to be resolved in a way that ends up with money being paid by the defendant. But the more time and energy that the lawyer puts into the case, the plaintiff’s lawyer, then the more money they have to get out of the case.

There’s incentive for both sides to settle early once they get beyond a motion to dismiss. And then if you go through discovery, there’s a huge incentive to settle before the trial. Because you never know what a jury’s going to do. Especially in a RICO case, it’s very complicated. Juries can be confused in both directions.

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