Fifth Third Mortgage Company v. Ira Kaufman ( 2019 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 18‐3295
FIFTH THIRD MORTGAGE COMPANY,
Plaintiff‐Appellee,
v.
IRA KAUFMAN, et al.,
Defendants‐Appellants.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 12 C 04693 — Matthew F. Kennelly, Judge.
ARGUED APRIL 15, 2019 — DECIDED AUGUST 9, 2019
Before WOOD, Chief Judge, and BAUER and ST. EVE, Circuit
Judges.
BAUER, Circuit Judge. Fifth Third Mortgage Company sued
several individuals and businesses after it fell victim to a
mortgage fraud scheme. At issue in this appeal is the personal
liability of Ira Kaufman. Kaufman participated in numerous
fraudulent closings as the attorney for the seller. Kaufman is
2 No. 18‐3295
also the owner of Traditional Title Company, LLC, which was
the title company used for several closings that facilitated the
fraud. For the reasons that follow, the judgment against
Kaufman is affirmed.1
I. BACKGROUND
The mortgage fraud scheme at issue began with Yaseen
Ahmed, the president of High Point Developers, Inc. Ahmed
also co‐owned 4725 S. Michigan, LLC, which owned a condo‐
minium building located at 4725 S. Michigan Avenue. Ahmed
obtained the proceeds of 35 mortgage loans through false
statements and omissions made in loan applications and
supporting documentation by purported buyers. Ahmed and
five others pleaded guilty to criminal offenses related to the
scheme.
Ahmed and another man, Eliot Higueros, recruited individ‐
uals to pose as buyers for units at 4725 S. Michigan Avenue.
These straw buyers submitted fraudulent loan applications to
various lenders, including Fifth Third. The participants in the
scheme split the loan proceeds when disbursed; no payments
were ever made on the loans.
Nine different borrowers purchased 26 properties at 4725 S.
Michigan Avenue. 4725 S. Michigan, LLC was the seller and
Kaufman was its attorney for each of the closings. The closings
were conducted by Traditional Title, and took place at Kauf‐
man’s law office. The loan applications contained misrepresen‐
1
Traditional Title, LLC is a co‐appellant with Ira Kaufman. However, no
argument is made in appellants’ brief about the judgment entered against
Traditional Title, LLC.
No. 18‐3295 3
tations about the buyers’ employment status, assets, and
income. The applications also falsely indicated the units were
going to be the primary residences of the buyers, despite each
buyer purchasing multiple units in the building.
Traditional received closing instructions from Fifth Third
that required it to notify the bank immediately of any misrep‐
resentations that would influence the bank’s decision to make
the loan. The instructions also required Traditional Title to
suspend the transaction and notify Fifth Third if “the loan is
owner occupied and the closing agent has knowledge that the
borrower does not intend to occupy the property.” Kaufman
failed to abide by either requirement by concealing the buyers’
misrepresentations from Fifth Third and instructing closing
agents to complete closings even when buyers were purchas‐
ing multiple properties.
Ahmed then extended the scheme to units in other build‐
ings. Fifth Third was the lender for four of these properties.
Kaufman participated in the transactions as the attorney for the
seller; Traditional Title did not participate in these closings.2
These properties include: unit 5 at 6621 S. Ingleside Avenue;
unit 2 at 7919 S. Phillips Avenue; unit 1 at 5416 S. Michigan
Avenue; and unit G at 5416 S. Michigan.
Kaufman testified that he was not aware of the mortgage
fraud scheme. He claimed that he reviewed the numbers for
the sales but “didn’t really look at the people.” He also said
2
Kaufman also acted as the seller’s attorney in several fraudulent
transactions where Fifth Third was not the lender; these related transactions
are detailed further in the district court’s opinion.
4 No. 18‐3295
that it was not his job as the seller’s attorney to review the
closing instructions or the buyer’s loan application. Ahmed
testified that Kaufman knew the buyers were part of the
scheme. Two closing agents, Julio Martinez and Michael Lee,
testified that they informed Kaufman about the misrepresenta‐
tions in the loan applications. Kaufman testified that they
never gave him that information.
Fifth Third filed seven claims of fraud against Kaufman,
based on his knowledge that the individuals had been re‐
cruited as straw buyers, and that they made false representa‐
tions in their loan applications. After a bench trial, the district
court entered judgment for Fifth Third against Kaufman.
II. ANALYSIS
We review questions of law de novo and questions of fact for
clear error. Joseph v. Sasafrasnet, LLC, 734 F.3d 745, 747 (7th Cir.
2013). To prevail on a common law fraud claim in Illinois a
plaintiff must prove five elements: “(1) a false statement of
material fact; (2) known or believed to be false by the person
making it; (3) an intent to induce the other party to act;
(4) action by the other party in reliance on the truth of the
statement; and (5) damage to the other party resulting from
such reliance.” Hoseman v. Weinschneider, 322 F.3d 468, 476 (7th
Cir. 2003). Anyone who aids and abets a fraud is “also guilty
of the tort of fraud … .” Hefferman v. Bass, 467 F.3d 596, 601 (7th
Cir. 2006). To state a claim for aiding and abetting under
Illinois law one must allege “(1) the party whom the defendant
aids performed a wrongful act causing an injury, (2) the
defendant is aware of his role when he provides the assistance,
No. 18‐3295 5
and (3) the defendant knowingly and substantially assisted the
violation.” Id.
A. Kaufman as Owner of Traditional Title
Kaufman argues the district court erred in finding him
personally liable for aiding and abetting the fraud in his
capacity as owner of Traditional Title because Illinois law
shields individuals for liability for torts committed in their
capacity as members of an LLC. Section 10‐10 of the Illinois
LLC Act provides that “the debts, obligations, and liabilities of
a limited liability company, whether arising in contract, tort, or
otherwise, are solely the debts, obligations, and liabilities of the
company. A member or manager is not personally liable for a
debt, obligation, or liability of the company solely by reason of
being or acting as a member or manager.” 805 ILCS
180/10‐10(a)(emphasis added); see also Dass v. Yale, 2013 IL
App (1st) 122520, ¶ 44.
Fifth Third first argues that Kaufman waived the argument
by failing to raise it prior to trial. Although an issue presented
for the first time in a Rule 59(e) motion generally is not timely
raised, “such an issue is subject to appellate review if the
district court exercises its discretion to consider the issue on the
merits.” Gerhartz v. Richert, 779 F.3d 682, 686 (7th Cir. 2015).
The district court considered Kaufman’s Rule 59(e) motion
raising Section 10‐10 of the Illinois LLC Act on its merits so this
Court will do the same.
Kaufman concludes that his liability was derivative of his
ownership of Traditional Title from several portions of the
judgment. In describing Fifth Third’s claim, the district court
stated “Fifth Third claims that Kaufman—by virtue of his roles
6 No. 18‐3295
as owner of Traditional Title and attorney for the seller—knew
that these individuals had been recruited to act as straw buyers
and made material false representations to the bank in their
loan applications.” Fifth Third Mortg. Co. v. Ira Kaufman, 2017
U.S. Dist. LEXIS 150525, at *24 (N.D. Ill. July 25, 2017). The
court concluded that “based on all the evidence, that Kaufman
was aware of the fraudulent scheme and his participation in it
as both the owner of Traditional Title and the attorney for the
sellers in the various transactions.” Id. at *30‐31. The court also
stated that “through his ownership of Traditional Title,
Kaufman substantially assisted the fraud regarding the two
disputed purchases by Daugherty and Taylor.” Id. at *31.
Kaufman was sued in his individual capacity, and not as a
member of Traditional Title and the judgment was entered
against him in his individual capacity. In denying Kaufman’s
Rule 59(e) motion, the district clarified that Kaufman was not
found liable solely as the manager of Traditional, but for his
own individual acts.
Kaufman participated individually in each of the closings
as counsel for the seller. He also personally directed Tradi‐
tional Title’s employees to conceal the fraud from Fifth Third.
In these dual roles he participated in the fraud for his own
personal gain. The judgment against Kaufman was not derived
solely from Traditional Title’s liability, based on his member‐
ship in the LLC. Section 10‐10 does not bar his liability here.
B. Kaufman as Attorney
Kaufman argues that the district court erred in finding him
personally liable for aiding and abetting the fraud as attorney
for the seller, because under Illinois law there can be no
No. 18‐3295 7
conspiracy between an agent and his principal. Kaufman also
argues that any actions he took as the closing attorney did not
substantially assist the fraud scheme.
Kaufman has waived this argument; he failed to raise it
before the district court either before judgment or in his 59(e)
motion. Additionally, there is no authority supporting Kauf‐
man’s contention that a lawyer cannot aid and abet a client’s
fraud as a matter of law. On the contrary, Illinois courts have
said
we see no reason to impose a per se bar that
prevents imposing liability upon attorneys who
knowingly and substantially assist their clients
in causing another partyʹs injury. As we have
recognized, one may not use his license to
practice law as a shield to protect himself from
the consequences of his participation in an
unlawful or illegal conspiracy. The same policy
should prevent an attorney from escaping
liability for knowingly and substantially assist‐
ing a client in the commission of a tort.
Thornwood, Inc. v. Jenner & Block, 799 N.E.2d 756, 768 (Ill. App.
Ct. 2003) (internal quotations and citations omitted).
Kaufman also argues the district court “committed prejudi‐
cial error in sua sponte changing the plaintiff’s cause of action
after the close of evidence.” This argument is raised for the first
time in Kaufman’s reply brief, styled as an answer to Fifth
Third’s waiver argument. This argument goes far beyond the
scope of replying to Fifth Third’s response. Kaufman did not
argue before the district court that it erred in, as Kaufman
8 No. 18‐3295
characterizes it, conflating “a cause of action for common law
fraud with a claim for aiding and abetting fraud.” Kaufman
also did not include this theory in his opening brief. This
argument is also waived.
The record supports the district court’s conclusion that
Kaufman was substantially involved in the scheme. Kaufman
reviewed closing statements, hosted the fraudulent closings at
his law firm, and attended the closings despite knowing the
loans were obtained using straw buyers to defraud the lenders
as a part of Ahmed’s scheme. Without his participation, the
scheme would have failed entirely.
III. CONCLUSION
Section 10‐10 of the Illinois LLC Act does not protect
Kaufman from liability. Kaufman is also not shielded by being
the attorney for the seller in these fraudulent transactions. The
district court’s judgment against him is affirmed.