Tuesday, August 24, 2010

FYI: 7th Cir Reverses Dismissal of FHA Allegations, Discusses Fed Ct Pleading Standards

The United States Court of Appeals for the Seventh Circuit recently held that a prospective home-equity loan borrower's ("Borrower") common law fraud claims against a lender and appraiser were properly dismissed by the lower court, but reversed the lower court's dismissal of the Borrower's Fair Housing Act, 15 U.S.C. § 3605 ("FHA"), claims against the lender and appraiser.


A copy of the opinion is available at:  http://www.ca7.uscourts.gov/tmp/0I0U8KYZ.pdf


Borrower brought suit against defendants CitiBank, N.A. ("CitiBank"), and the appraiser hired by CitiBank ("Appraiser"), under the FHA and the Equal Credit Opportunity Act, 15 U.S.C. § 1691(a)(1).  Borrower alleged that CitiBank conditionally accepted her for a home-equity loan, but CitiBank had the property appraised well below the value stated on the loan application in order that Citibank could deny the loan.  Borrower alleged that CitiBank's and Appraiser's actions were motivated by racial discrimination.  The lower court construed these allegations to include a common law fraud claim against the defendants in Borrower's complaint. 


The lower court granted Citibank's motion to dismiss as to all claims, and Borrower appealed only the FHA and common law fraud allegations.  The Seventh Circuit affirmed the lower court as to the common law fraud claim, but reversed as to the FHA claim.


The Court held that Borrower stated a claim against CitiBank under the FHA.  As you may recall, the FHA "prohibits businesses engaged in residential real estate transactions, including '[t]he making…of loans or providing other financial assistance…secured by residential real estate' from discriminating against any person on account of race."  The Court reasoned that Borrower's "complaint identifies the type of discrimination that she thinks occurs (racial), by whom (CitiBank…through Appraiser), and when (in connection with her effort in early 2009 to obtain a home-equity loan."  


The Court also held that Borrower stated a claim against Appraiser under the FHA.  The Court rejected Appraiser's argument that the FHA does not apply to appraisers, noting that Section 3605(b)(2) includes "the selling, brokering, or appraising of residential real property" in the definition of "residential real estate-related transactions."  Borrower's pleading was sufficient because she alleged that Appraiser "knew [Borrower's] race, and she accuses them of discriminating against her in the specific business transaction that they had with her" by inaccurately valuing her property.


The Seventh Circuit went on to affirm the lower court's ruling that Borrower failed to state a claim against CitiBank and Appraiser for common law fraud.  Under the heightened pleading standards of Federal Rule of Civil Procedure 9(b) for fraud claims, "a plaintiff must plead actual damages arising from her reliance on a fraudulent statement."  In addition, "only out-of-pocket losses allegedly arising from the fraud are recoverable" where there is no contract.  In this case, there was no contract between CitiBank and Borrower, and Borrower "never alleged that she lost anything from the process of applying for the loan."  As to Appraiser, Borrower failed to allege "that she relied on their appraisal" or "any out-of-pocket losses that she suffered because of it."


The Court also addressed the proper pleading standard under Federal Rule of Civil Procedure 8(a) in light of the "plausibility" standard set forth by the Supreme Court in Twombly, Erickson and Iqbal.  According to the Seventh Circuit, a pleading does not require "specific facts" and the district court should not decide "which version is more likely than not."  Rather, "the plaintiff must give enough details about the subject-matter of the case to present a story that holds together."  "In other words, the court will ask itself could these things have happened, not did they happen."  However, "abstract recitations of the elements of a cause of action or conclusory legal statements" are insufficient to state a cause of action under Rule 8(a). 


The dissent argued that the majority incorrectly drew a distinction between discrimination cases and "more complex" cases, thereby misapplying the pleading standard set forth in Twombly and Iqbal.  The dissent also characterized Borrower's allegations as implausible, reasoning that "all that's alleged (besides pure speculation about the defendants' motive) is that someone was denied a loan because her house is mistakenly appraised for less than its market value."  For this, as well as concerns about asymmetric discovery burdens, the dissent argued the lower court was correct in dismissing Borrower's FHA claims.

Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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