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Appeals Court Allows Appraisal Fraud Suit to Proceed Despite Forum Selection Clause - Bailey v. ERG Enterprises et al.

February 14, 2013

Vincent Howard and our Rancho Cucamonga predatory lending lawyers wrote not long ago about a predatory lending case that concerns property sold in the Bahamas, but ended up in Florida federal court. That case contained allegations that a variety of real estate companies, many of which were owned by the same person, conspired to inflate the appraisal of the property. So we were interested to see one of the same defendants in Bailey et al v. ERG Enterprises et al., another appraisal fraud case seeking to defeat a Bahamas forum. The plaintiffs were buyers of undeveloped lots in a planned Bahamian resort. They alleged that Bahamas Sales Associates, Lubert-Adler Management and other related entities inflated the prices and also committed loan fraud that damaged the resort development. The Eleventh Circuit rejected the defendants' arguments that the cases should be heard in the Bahamas, as a purchase contract requires.

The buyers bought lots in the Ginn Sur Mer subdivision of Grand Bahama Island, from Ginn-LA West End Limited. Each purchase contract specified that disputes should be heard in Bahamian courts. Many, but not all, of the buyers took out the loans from Bahamas Sales, whose own contract specified forum in Florida. The customers who borrowed from Bahamas Sales sued that company and several related companies in May of 2010, alleging RICO causes of action for appraisal fraud. All buyers also sued Ginn and Lubert-Adler entities, saying the terms of their development loan from Credit Suisse prevented them from actually developing the promised and contractually required resort. Defendants moved to dismiss and enforce the Bahamas forum-selection agreement and the district court agreed, saying that even those entities not signing the contract could enforce it via equitable estoppel.

The Eleventh Circuit first rejected an argument that Bahamas Sales was bound by its own contract to hear cases in Florida, noting that its recent decision in Bahamas Sales v. Byers found that those contracts only bind the buyers. Relying on the same recent case, the court found that the appraisal fraud claims do not fall under the purchase contracts, which means it declined to require Bahamian litigation. It went on to find that the Credit Suisse claims also do not fall under the purchase contracts, because they have no direct relationship to the lot purchase contracts. Furthermore, the court said, the lot purchase contracts bind only the parties that signed them, who are Ginn-LA and the buyers. The entities sued over the Credit Suisse claims were not parties, the Eleventh noted, and thus the forum-selection clauses don't apply. Finally, the appeals court rejected the district court's equitable estoppel logic, saying a "but-for" relationship is not strong enough reliance on the contract to require it.

Vincent Howard and our Anaheim predatory lending attorneys are pleased to see that this case will be litigated in the United States, just as Byers will be. It looks as if a large number of buyers have claims against the entities in this case, suggesting that there is some truth to their claims. It also looks like many of the entities are related through corporate structure, common ownership or both, which suggests an overly cozy relationship that invites fraud. Appraisal fraud was not just a Bahamian problem during the bubble, as many in southern California know; entities with common ownership inflated appraisals across the U.S. when housing prices were soaring. Vincent Howard and our Rubidoux predatory lending lawyers are now representing borrowers burned by that practice.

Howard Law, P.C., represents Californians from all backgrounds and walks of life who believe they were defrauded and deceived when they took out mortgages. To tell us your story and learn more about our services, call us today at 1-800-872-5925 or send us a message through our website.

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